-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TXZf5rqDBW1AMfZMTiTnH149ZjiXMlljXFNPduBXDenoho+U5aBa7ZpWT7+MqgQe NplsGQ6iN5tzjzzvPJCCxg== 0001014763-07-000004.txt : 20070326 0001014763-07-000004.hdr.sgml : 20070326 20070326150824 ACCESSION NUMBER: 0001014763-07-000004 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070326 DATE AS OF CHANGE: 20070326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMARILLO BIOSCIENCES INC CENTRAL INDEX KEY: 0001014763 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 751974352 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20791 FILM NUMBER: 07717884 BUSINESS ADDRESS: STREET 1: AMARILLO BIOSCIENCES INC STREET 2: 4134 BUSINESS PARK DRIVE CITY: AMARILLO STATE: TX ZIP: 79110-4225 BUSINESS PHONE: (806) 376-1741 MAIL ADDRESS: STREET 1: AMARILLO BIOSCIENCES INC STREET 2: 4134 BUSINESS PARK DRIVE CITY: AMARILLO STATE: TX ZIP: 79110-4225 10KSB 1 form10ksb123106.htm FORM 10KSB 123106 Form 10KSB 123106
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[ X ]
 
  
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required]
For the Fiscal Year Ended December 31, 2006
 
   
[ ]
 
  
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required]
 
Commission File Number 0-20791
 
   
AMARILLO BIOSCIENCES, INC.
(Name of small business issuer in its charter)
 
   
Texas
(State of other jurisdiction of incorporation or organization)
 
75-1974352
(I.R.S. Employer Identification No.)
 
   
 
4134 Business Park Drive, Amarillo, Texas
(Address of principal executive offices)
 
 
79110-4225
(Zip Code)
 
Issuer’s telephone number, including area code: (806) 376-1741
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $.01
 
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ]

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No  

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ X ]

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12(b)(2) of the Exchange Act). Yes No

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Revenues for its most recent fiscal year were $133,942.

As of December 31, 2006, there were outstanding 24,476,767 shares of the registrant’s common stock, par value $.01, which is the only class of common or voting stock of the registrant. As of that date, the aggregate market value of the shares of common stock held by non-affiliates of the registrant (based on the closing price for the common stock on the OTC BB.AMAR) was approximately $12,799,970.

PART I

The following contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including those set forth in “Management’s 2007 Plan of Operations” as well as those discussed elsewhere in this Form 10-KSB. The following discussion should be read in conjunction with the Financial Statements and the Notes thereto included elsewhere in this Form 10-KSB.

ITEM 1. DESCRIPTION OF BUSINESS.

General

Amarillo Biosciences, Inc. (the “Company” or “ABI”), a Texas corporation formed in 1984, is engaged in developing biologics for the treatment of human and animal diseases. The Company is currently focusing its research on human health indications for the use of low-dose orally administered natural human interferon alpha, particularly for Behcet’s disease and oral warts in HIV+ patients. The Company believes that significant worldwide opportunities exist for the development of low-dose orally administered natural interferon alpha as a cost-effective, non-toxic, efficacious alternative to the treatment of diseases by injection of high doses of interferon alpha. In addition, the Company believes that low-dose orally administered natural human interferon alpha will be an effective treatment for diseases or conditions for which current therapies are inadequate.
 
The Company owns or licenses 12 issued United States patents relating to the use or composition of low-dose oral natural interferon alpha and one patent on the dose formulation of our dietary supplement. Since 1992, the Company has filed with the U.S. Food and Drug Administration (“FDA”), and there now are in effect, seven Investigational New Drug (“IND”) Applications covering indicated uses for low-dose oral interferon alpha, including treatment of Behcet’s disease, Sjogren’s syndrome, idiopathic pulmonary fibrosis and oral warts in HIV+ patients.
 
The Company’s objective is to exploit its proprietary technology to become a leader in the field of low-dose oral applications of interferon alpha. The Company’s business strategy is to pursue those indications for low-dose oral interferon alpha treatment for which initial clinical research has indicated the treatment is efficacious and which, in the opinion of the Company, have the greatest commercial potential and are most likely to be approved by the FDA. To the extent possible, the Company will attempt to minimize the cost to the Company of obtaining FDA approval by utilizing forms of interferon alpha already approved (in other dosage forms and for different indications) by the Japanese Ministry of Health and
 

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Welfare for human or animal use. The Company believes that cost savings will result from this strategy. The Company will attempt to gain market share for approved products by forming alliances with strong marketing partners.
 
The Company has six full-time employees. The Company makes extensive use of consultants in business and research and development. Governmental or FDA approval is required on the Company’s principal products. The Company’s progress toward approval is discussed under each specific indication, below.
 
Human Health Applications

Sjogren’s Syndrome. Sjogren’s syndrome is a chronic autoimmune disorder characterized by dryness of the eyes and mouth. It can exist as a primary disorder or in association with other autoimmune diseases such as rheumatoid arthritis, systemic lupus erythematosus and scleroderma. Patients with primary Sjogren’s syndrome may have clinical signs such as rash, arthritis, pneumonitis and nephritis. Typical symptoms include the sensation of burning in the eyes, difficulty swallowing, painful throat, fatigue and dryness of the mouth, skin, nose and vagina. Oral candidiasis (a fungal infection of the mouth) may also arise as a result of reduced saliva flow. Although Sjogren’s syndrome is not life threatening, it can cause extreme discomfort and seriously impair quality of life.
 
The Sjogren’s Syndrome Foundation, Inc. estimates that there are approximately two to four million people in the United States who suffer from Sjogren’s syndrome. The Company believes that the incidence of Sjogren’s syndrome worldwide is similar to its incidence in the United States. Women constitute 90% of Sjogren’s syndrome patients.
 
Topical use of artificial tears is the prevailing treatment for the dry eye symptom of the disease. Artificial tears must be used on a regular basis. Intensive oral hygiene is prescribed to prevent progressive oral problems that may develop as a result of the disease. Topical and systemic means of increasing salivary flow may provide transient relief of symptoms.
 
The Company believes that oral interferon alpha therapy helps to relieve the dryness associated with Sjogren’s syndrome, improves secretory function, and may effectively supplement, or be used in lieu of existing treatments. The Company has completed two 24-week Phase III clinical trials of the use of interferon alpha lozenges in the treatment of primary Sjogren’s syndrome. Results of both Phase III clinical trials demonstrate an improvement in saliva production in treated patients (see Arthritis Care & Research, 49:585-593, 2003). The studies were double-blinded, placebo-controlled tests in which a total of 497 patients were treated three times daily for 24 weeks with a lozenge containing either 150 international units (IU) of interferon alpha or a placebo. Analysis of participants who completed the trials, designated as evaluable patients, found a significant (p=0.01) increase in unstimulated whole saliva (UWS) production among the interferon alpha treated patients, as compared to those who received placebo. Increases in UWS are important to the Sjogren’s patient since UWS represents the basal salivary flow that is present over 90% of the day.
 

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Importantly, in interferon alpha treated subjects a significant (p>0.05) correlation was seen between increases in UWS and improvement in a number of the symptoms of Sjogren’s syndrome that were assessed in the study, including oral dryness, throat dryness, nasal dryness and the ability to swallow foods. This finding suggests that patients were able to perceive a benefit of having increased salivary flow.
 
Because UWS was a secondary, and not the primary end point of these studies, these promising findings did not result in FDA approval. Instead, the FDA suggested that the Company sponsor an additional, large-scale Phase III study that would include UWS flow as the primary endpoint.
 
The Company proposes to start a study designed to demonstrate, by biopsy, improvement at the site of disease activity, the salivary glands. The biopsy study will be useful in establishing UWS as a surrogate marker for disease activity and in providing insight into the mechanism of action of orally administered interferon-alpha. The start date for the study has not been established yet.
 
Oral Warts in HIV+ Patients. Oral warts are lesions in the mouth caused by the human papillomaviruses. In open-label Phase I/II clinical studies with 36 patients, complete or partial clearance of oral warts was achieved in 71% (5/7) of HIV+ subjects given interferon-a at 1500 international units (IU) per day. A double-blind, placebo-controlled Phase II study to confirm and expand these findings is ongoing at six clinical sites in the USA. The Company filed with the FDA Office of Orphan Drugs and was granted (Summer 2000) orphan drug status for low dose IFNa treatment in this condition.
 
Behcet’s Disease. Behcet’s disease is a severe chronic relapsing inflammatory disorder marked by oral and genital ulcers, eye inflammation (uveitis) and skin lesions, as well as varying multisystem involvement including the joints, blood vessels, central nervous system, and gastrointestinal tract. The oral lesions are an invariable sign, occurring in all patients at some time in the disease. Behcet’s disease is found world-wide, and is a significant cause of partial or total disability. The US patient population has been estimated as 15,000. The Company filed with the FDA Office of Orphan Drugs and was granted (Spring 2000) orphan drug status for low dose orally administered IFNa treatment in this condition. A double-blind, placebo-controlled Phase II trial is ongoing in Turkey.
 
At the end of February, 2006, Martin Cummins, Vice President of Regulatory and Clinical Affairs for ABI, visited Nobel Ilac Sanayii Ve Ticaret A.S, ABI’s licensee in Turkey. He conducted in study initiation meetings with the clinical investigators prior to the commencement of enrollment of 90 patients with Behcet’s disease in a study of interferon lozenges versus placebo. The treatment duration is 12 weeks, with completion of the study expected within calendar year 2007. At the time of this document’s preparation, 58 of 90 patients have been enrolled.
 
Idiopathic Pulmonary Fibrosis. Idiopathic Pulmonary Fibrosis (IPF) is a chronic inflammatory fibrotic disorder localized to the lower respiratory tract and characterized by an alveolitis dominated by alveolar macrophages, polymorphonuclear leukocytes (PMNs) and, to a lesser extent, lymphocytes and eosinophils. The disease usually presents as dyspnea on exertion, the chest x-ray shows diffuse reticulonodular infiltrates, and analysis of lung function reveals restrictive abnormalities. The disease process does not affect the upper or conducting airways, but bronchiolitis of respiratory bronchioles may be present and alveolar units are always involved.
 

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Normally, overlying or interspersed in the alveoli are a variety of immune cells, including alveolar macrophages, dendritic macrophages, interstitial monocytes, lymphocytes, and inflammatory cells, such as PMNs and eosinophils. The cellular content of normal bronchial-alveolar lavage (BAL) fluid consists of approximately 80 percent alveolar macrophages, 10 percent lymphocytes (of which 70 percent are T lymphocytes), 1 to 5 percent B lymphocytes or plasma cells, 1 to 3 percent PMNs, and 1 percent eosinophils. In the lymphocyte population, the ratio of CD4 T helper and CD8 T suppressor/cytotoxic cells is about 1.5.
 
In the earliest, reversible forms of alveolar injury, “leakiness” of the alveolar type I cells and the adjacent capillary endothelial cells occurs, causing alveolar and interstitial edema and the formation of intra alveolar hyaline membranes. With persistence of the disease, increased alveolar-capillary permeability and desquamation of intra-alveolar cells (alveolitis), mural inflammation, and interstitial fibrosis are present on biopsy. This process is also reflected in the composition of cells and enzymes recovered in BAL fluid and in cellular components present in lung biopsy tissue. The presence and severity of the disease process are spotty in distribution; a continuum of inflammatory and fibrotic changes can be found throughout the affected lung. Fibrosis follows from an organization of inflammatory exudate within the airspaces in which fibroblasts beneath the type I epithelium proliferate and increase their production of fibronectin and collagen. Death of the patient usually occurs within 4-5 years of diagnosis.
 
Oral interferon has been tested by Dr. Lorenz Lutherer at Texas Tech University Health Science Center in Lubbock for the treatment of patients with IPF. This IPF study was funded by a grant from the State of Texas, and the first patient was enrolled over five years ago. Eighteen subjects were enrolled and given 150 IU of interferon three times daily. The subjects were evaluated with pulmonary function tests quarterly and chest x-rays and high resolution computed tomography (HRCT) annually.
 
On March 3, 2006 in Atlanta at the Regional Annual Meeting of the Southern Society for Clinical Investigations, Dr. Lutherer concluded the following:
1)  Treatment with low-dose, oral interferon was tolerated by patients without side effects.
2)  Retrospective data suggest that this treatment leads to a rapid and significant reduction in the cough associated with IPF, resulting in improved quality of life.
3)  All subjects had severely compromised lung function on study entry. Most of the ten subjects treated for a 12-month period had stable or minimally progressive disease.
4)  Each of the subjects served as their own control and there was no placebo control group for comparison. Given the well-documented rapid rate of progression and the short life expectancy after diagnosis, stability over this long period of time in this high percentage of subjects strongly suggests efficacy of oral interferon.
5)  Treatment with low-dose, orally administered interferon may be a safe, inexpensive and non-invasive way to prevent or decrease the rate of further deterioration of lung function.
 
In collaboration with Dr. Lutherer, the Company applied for an NIH grant in December 2006 to fund a phase II study for oral interferon treatment of IPF-related chronic coughing. A funding decision is expected in the second quarter of 2007.
 

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Influenza. Warnings have been issued that the avian influenza virus presently killing animals and people in Asia may become the new strain of pandemic flu, which could potentially kill millions of people. These warnings have sparked renewed interest in ways to treat or prevent influenza. Clinical observations from thousands of influenza patients in Russia, Ukraine, Bulgaria, China, and Japan indicate significant clinical benefits to patients intranasally given low-dose (a few hundred to 10,000 units) interferon during natural outbreaks of influenza. In contrast, in experimental influenza virus challenge studies with human volunteers, those volunteers given 800,000 to 70 million units of interferon by intranasal delivery did not experience a clinical benefit. Data generated using low dose interferon was rejected by Western scientists because of the impure nature of the interferon used in early studies and because the low dose interferon did not seem to make any sense. Recent animal studies funded by the Company suggest that the subject of low dose interferon for influenza should be revisited. Both intranasal and oral administration of low-dose interferon deliver interferon to the same receptors in the oropharyngeal cavity. Low-dose oral interferon may represent an inexpensive, safe way to modulate the immune system during, or before, influenza infection.
 
Dr. Manfred Beilharz, the Head of the 2005 Nobel Prize-winning Department of Microbiology and Immunology at the University of Western Australia, recently completed animal studies of influenza prophylaxis using oral interferon. Mice treated with 100 IU of oral interferon per day before and after a lethal influenza challenge survived compared to placebo-treated mice. Animal studies by Dr. Troy Randall of the Trudeau Institute found similar results. ABI’s partner in Taiwan, CytoPharm, will fund and start a human Phase II study of oral interferon treatment of influenza in 2007. 
 
Bone Marrow Disorders. ABI sponsored a test of low dose oral interferon alpha in patients with rare bone marrow proliferative disorders at the University of Texas MD Anderson Cancer Center in Houston, TX. Patients with either polycythemia vera (PV) or essential thrombocythemia (ET) were eligible to participate. The goal was to explore low dose oral interferon alpha daily as a means of reducing the elevated blood counts observed in such patients, with the hope of reversing the bothersome symptoms associated with these disorders. This study was predicated on positive data obtained from an earlier study.
 
PV and ET are stem cell disorders considered to be incurable. Treatment efforts strive to reduce clotting events in ET patients, who are at high-risk for thrombosis due to their elevated platelet count. All patients with PV require phlebotomy (drawing blood), because of elevated hematocrit levels (the concentration of red blood cells). This maneuver prolongs survival by decreasing, but not abolishing, the risk of thrombosis.
 
In a previous study sponsored by the Company at the Mayo Clinic in Rochester, MN, 4 of 7 PV subjects given oral interferon alpha had a ³50% reduction in phlebotomy requirement, compared to the 6 months prior to the study, and consequently were considered partial responders. One of 6 ET subjects given oral interferon alpha experienced normalization of platelet count, a complete response. No serious adverse events occurred in this previous study.
 
A total of 14 patients (8 PV, 6 ET) were given oral interferon-alpha in the current study for a median time of 3 months (range 2.5 to 6). No deaths, serious adverse events or significant increases in abnormal blood counts were observed, further demonstrating the safety of this therapy. However, the positive results noted in the previous trial were not confirmed as none of the current patients experienced a significant decrease in their abnormal blood counts. The study was closed in the 4th quarter of 2006.
 
 

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Chronic Hepatitis B. Approximately 2 billion people are infected with hepatitis B virus worldwide with more than 350 million having lifelong chronic hepatitis B infection. Chronic hepatitis B causes cirrhosis and liver cancer and kills approximately one million people each year. The disease can be quite severe and long lasting for those that recover. Vaccination for chronic hepatitis B is 95% effective. Hepatitis B is transmitted by contact with blood or body fluids (sexual contact) of infected people. Infections may also be transmitted from mother to child. Chronic hepatitis B is currently treated with antivirals (lamivudine, entecavir and adefovir dipivoxil) and immunomodulators (injectable pegylated interferons). Side effects of injectable pegylated interferons are common and often severe. Chronic hepatitis B requires long term treatment. Lamivudine resistance develops in approximately 24% of patients after one year and 67% after four years.
 
AMAR conducted a Phase 2 hepatitis B study in Poland where the incidence of the disease is high. Hepatitis Be antigen seroconversion occurred in 52% of the patients treated with AMAR’s low-dose oral interferon-alpha. Seroconversion indicates that there is no evidence of hepatitis B in the blood. Side effects for AMAR’s low-dose oral interferon are low compared with the common and often severe side effects of high dose injectable interferon.
 
AMAR’s partner in Taiwan, CytoPharm, will start a study of oral interferon treatment of chronic hepatitis B in 2007.
 
 Strategic Alliance with HBL
 
Hayashibara Biochemical Laboratories, Inc. (“HBL”) was established in 1970 to engage in research and development. It is a subsidiary of Hayashibara Company, Ltd., a privately-owned Japanese holding corporation with diversified subsidiaries. For more than 130 years the Hayashibara Company, Ltd. and its predecessors have been applying microbiological technology in the starch industry for the production of maltose and other sugars.
 
In 1981, HBL established the Fujisaki Institute to accelerate development of industrial methods for the production of biologics and to sponsor clinical trials for such products. In 1985, HBL built the Fujisaki Cell Center to support basic research. In 1987, HBL successfully accomplished the mass production of human cells in an animal host by producing human cells in hamsters. This made it possible to economically produce a natural form of human interferon alpha and other biologics. HBL also has developed and obtained patents for technology relating to the production of interferon alpha-containing lozenges by which the stability of the interferon alpha activity can be maintained for up to 24 months at room temperature and up to five years if the product is refrigerated. The Company believes that the use of such lozenges gives it advantages over competitive technologies in terms of cost, taste and ease of handling. On March 13, 1992, the Company entered into a Joint Development and Manufacturing/Supply Agreement with HBL (the “Development Agreement”). Such Development Agreement was subsequently amended on January 17, 1996; May 10, 1996; and September 7, 2001. The current expiration date of the Development Agreement is March 12, 2008, at which time it will automatically renew for an additional three (3) years, unless the parties agree otherwise. Among other things, the Development Agreement provides the Company with a source of natural human interferon alpha for use in the Company’s interferon alpha-containing products. Additional information on the Development Agreement is set forth in Note 4 to the Financial Statements attached to this 10-KSB.
 

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Strategic Alliance with Nobel
 
The Company signed a licensing and supply agreement in September 2004 with a leading Turkish pharmaceutical company, NOBEL ILAC SANAYII VE TICARET A.S., providing the rights to oral low-dose interferon-alpha for the treatment of Behcet’s disease in Turkey and in Azerbaijan, Bosnia & Herzegovina, Bulgaria, Croatia, Georgia, Kazakhstan, Kyrghyzstan, Macedonia, Romania, Russia, Saudi Arabia, Slovenia, Tajikistan, Turkmenistan, Uzbekistan, and Federal Republic of Yugoslavia.
 
The license agreement covers a territory whose population is approximately 365 million. In Turkey, where the disease is more than 600 times more prevalent than in the United States, there are from 56,000 to 259,000 people who are afflicted with the disease, according to a review published in the New England Journal of Medicine. The U.S. Food and Drug Administration (FDA) has granted Orphan Drug Designation for this product for the clinical indication of Behcet’s Disease to Amarillo Biosciences. The Orphan Drug Designation is designed to promote the development of treatments for diseases rare in the United States and provides certain marketing exclusivity incentives outlined under the Orphan Drug Act.
 
Under the terms of the agreement, ABI and NOBEL will conduct Behcet’s disease studies in Turkey under an Investigating New Drug (IND) Application submitted by ABI to the U.S. FDA. U.S. FDA approval will be sought and this FDA approval will be owned by ABI, but will be used by NOBEL to seek regulatory approval in each country of the Territory.
 
In 2005, the clinical protocol was developed, clinical supplies were made and packaged, and clinical investigators identified. The study is ongoing and at the time of preparation of this document, 58 of 90 patients have been enrolled in a study of interferon lozenges versus placebo. The treatment duration is 12 weeks, with completion of the study expected within 2007.
 
Strategic Alliance with Bumimedic
 
On January 19, 2006, Amarillo Biosciences, Inc announced that it had entered into a distribution agreement with Bumimedic (Malaysia) Sdn. Bhd, a Malaysian pharmaceutical company that is a part of the Antah HealthCare Group, to market ABI’s low-dose interferon (natural human IFN) in Malaysia. Bumimedic will seek registration for ABI’s natural human IFN and commence marketing the product after approval. The terms of the agreement call for Bumimedic to manufacture lozenges from ABI’s bulk natural human IFN (which is supplied by Hayashibara Biochemical Laboratories); package the lozenges and distribute them to local hospitals, pharmacies and clinics in Malaysia. Pursuant to the agreement, ABI will receive a series of payments, in three stages: upon formal execution of the distribution agreement, upon regulatory approval, and upon production. ABI will also receive a royalty on the sale of the natural human IFN. This agreement was made possible through the Company’s previously announced relationship with Dr. Claus Martin, President and CEO, Gessellschaft Fur Medizinisch and Technische Investionen mbH & CoKG. (GMTI), a privately held German venture capital group. Bumimedic has entered into discussions with Malaysian regulatory agencies to conduct clinical trials for oral interferon treatment of influenza. 
 
Strategic Alliance with CytoPharm
 
In November 27, 2006, ABI announced that it had entered into a License and Supply Agreement with CytoPharm, Inc., a Taipei, Taiwan-based biopharmaceutical company whose parent company is Vita
 

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Genomics, Inc., the largest biotech company in Taiwan specializing in pharmacogenomics and specialty Clinical Research Organization. Under the terms of the Agreement, CytoPharm and its subsidiary will conduct all clinical trials, and seek to obtain regulatory approvals in both China and Taiwan (the Territory) to launch ABI’s low dose oral interferon in the Territory for influenza and hepatitis B (HBV) indications. CytoPharm has entered into discussions with regulatory agencies in the Territory to conduct clinical trials for oral interferon treatment of hepatitis B and influenza, which are expected to commence in 2007. According to the Agreement, CytoPharm will make payments to ABI upon reaching certain milestones and will also pay royalties on low dose oral interferon sales in the Territory.
 
License Agreement with Global Kinetics
 
On October 19, 2005, ABI entered into a License and Supply Agreement with Global Kinetics, Inc. Under the terms of the Agreement Global will conduct all clinical trials and seek to obtain regulatory approvals in Cambodia, Vietnam and Laos for oral interferon treatment of human diseases. ABI terminated the Agreement under provisions therein by giving notice to Global on January 10, 2007. ABI is currently seeking license agreement candidates for this territory.
 
Publishing
 
A manuscript entitled “Protection From Lethal Influenza Virus Challenge by Oral Type 1 Interferon” was published online by the Biochemical & Biophysical Research Communication in February 12, 2007.
 
Patents and Proprietary Rights
 
Since its inception, ABI has worked to build an extensive patent portfolio for low-dose orally administered interferon. This portfolio consists of patents with claims that encompass method of use or treatment, composition of matter and manufacturing. During 2006 one patent expired and two new patent applications were filed. ABI presently owns or licenses 12 patents and two pending patents related to low-dose orally delivered interferon, and one issued patent on ABI’s dietary supplement. ABI has vigorously enforced its patent position in the past, resulting in successful settlement. There are no current patent litigation proceedings involving ABI.
 
Cost of Compliance with Environmental Regulations
 
The Company incurred no costs to comply with environment regulations in 2006.
 
Competition 
 
The pharmaceutical industry is an expanding and rapidly changing industry characterized by intense competition. The Company believes that its ability to compete will be dependent in large part upon its ability to continually enhance and improve its products and technologies. In order to do so, the Company must effectively utilize and expand its research and development capabilities and, once developed, expeditiously convert new technology into products and processes, which can be commercialized. Competition is based primarily on scientific and technological superiority, technical support, availability of patent protection, access to adequate capital, the ability to develop, acquire and market products and processes successfully, the ability to obtain governmental approvals and the ability to serve the particular needs of commercial customers. Corporations and institutions with greater resources than the Company may, therefore, have a
 

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significant competitive advantage. The Company’s potential competitors include entities that develop and produce therapeutic agents for treatment of human and animal disease. These include numerous public and private academic and research organizations and pharmaceutical and biotechnology companies pursuing production of, among other things, biologics from cell cultures, genetically engineered drugs and natural and chemically synthesized drugs. Almost all of these potential competitors have substantially greater capital resources, research and development capabilities, manufacturing and marketing resources and experience than the Company. The Company’s competitors may succeed in developing products or processes that are more effective or less costly than any that may be developed by the Company or that gain regulatory approval prior to the Company’s products. The Company also expects that the number of its competitors and potential competitors will increase as more interferon alpha products receive commercial marketing approvals from the FDA or analogous foreign regulatory agencies. Any of these competitors may be more successful than the Company in manufacturing, marketing and distributing its products. There can be no assurance that the Company will be able to compete successfully.
 
Government Regulation
 
Once a new compound has been identified in the laboratory, medicines are developed as follows:
 
Preclinical Testing. A pharmaceutical company conducts laboratory and animal studies to show biological activity of the compound against the targeted disease, and the compound is evaluated for safety.
 
Investigational New Drug Application (“IND”). After completing preclinical testing, a company files an IND with the FDA to begin to test the drug in people. The IND becomes effective if the FDA does not disapprove it within 30 days. The IND shows results of previous experiments; how, where and by whom the new studies will be conducted; the chemical structure of the compound; how it is thought to work in the body; any toxic effects found in the animal studies; and how the compound is manufactured. All clinical trials must be reviewed and approved by the Institutional Review Board (“IRB”) where the trials will be conducted. Progress reports on clinical trials must be submitted at least annually to FDA and the IRB.
 
Clinical Trials, Phase I. These tests involve about 20 to 80 normal, healthy volunteers. The tests study a drug’s safety profile, including the safe dosage range. The studies also determine how a drug is absorbed, distributed, metabolized and excreted as well as the duration of its action.
 
Clinical Trials, Phase II. In this phase, controlled trials of approximately 100 to 300 volunteer patients (people with the disease) assess a drug’s effectiveness.
 
Clinical Trials, Phase III. This phase usually involves 1,000 to 3,000 patients in clinics and hospitals. Physicians monitor patients closely to confirm efficacy and identify adverse events. These numbers may be modified based on the disease prevalence.
 
New Drug Application (“NDA”)/Biologics License Application (“BLA”). Following the completion of all three phases of clinical trials, a company analyzes all of the data and files with FDA an NDA, in the case of a drug product, or a BLA in the case of a biologic product, if the data successfully demonstrate both safety and effectiveness. The NDA/BLA contains all of the scientific information that the Company has gathered. NDA’s typically run 100,000 pages or more. By law, FDA is allowed twelve months to review a standard NDA/BLA.
 

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Approval. Once FDA approves an NDA, the new medicine becomes available for physicians to prescribe. A company must continue to submit periodic reports to FDA, including any cases of adverse reactions and appropriate quality-control records. For some medicines, FDA requires additional trials (Phase IV) to evaluate long-term effects.
 
Research and Development
 
During the years ended December 31, 2006 and 2005, the Company incurred expenses of $535,075 and $187,810, respectively, resulting from Company-sponsored research and development activities. Research and development is expected to remain a significant component of the Company’s business. The Company has arranged for others, at their cost, to perform substantially all of its clinical research and intends to continue to do so while utilizing its staff for monitoring such research. See also ITEM 6, “MANAGEMENT’S 2007 PLAN OF OPERATIONS - Research and Development”.

ITEM 2. DESCRIPTION OF PROPERTY.
 
The Company’s executive and administrative offices are located at 4134 Business Park Drive, Amarillo, Texas in a 3,600 square-foot facility rented by the Company. The building contains offices and a small warehouse.

ITEM 3. LEGAL PROCEEDINGS.
 
None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
The annual meeting of shareholders was noticed and convened on June 22, 2006, to consider the election of directors, the authorization to vote proxies on other business to properly come before the meeting, and to adjourn the meeting to solicit additional votes. There were fewer than 50% of the outstanding shares of the Company represented at the meeting so the meeting was adjourned until July 7, 2006, in order to solicit additional votes and obtain a quorum.
 
The following persons were directors of the Company before the meeting and continued to serve as directors of the Company until the meeting was reconvened on July 7, 2006: Joseph M. Cummins, Stephen Chen, James Page, Dennis Moore, and Katsuaki Hayashibara.
 
The meeting reconvened on July 7, 2006, with 11,181,724 shares of the voting common stock of the Company represented, being 51.8% of the issued and outstanding voting common shares of the Company, and constituting a quorum.
 
Proposition 1 - Election of Directors.
 
The following directors were elected at the meeting to serve until the next annual meeting of shareholders or until their successor shall have been duly elected and qualified:
 
Director No. 1 - Joseph M. Cummins - 11,126,872 shares voted in favor and 54,852 share withheld;
 
Director No. 2 - Stephen Chen - 11,163,449 shares voted in favor and 18,275 withheld;
 

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Director No. 3 - James Page - 11,159,449 shares voted in favor and 22,275 withheld;
 
Director No. 4 - Dennis Moore - 11,109,001 shares voted in favor and 72,723 withheld;
 
Director No. 5 - Thomas D’Alonzo - 11,159,449 shares voted in favor and 22,275 withheld; and
 
Director No. 6 - Thomas Ulie - 11,109,301 shares voted in favor and 72,423 withheld.
 
Proposition 2 - Authorization to vote Proxies on Other Business to Properly Come Before the Meeting.
 
Proposition 2 passed by a vote of 11,091,549 shares voted in favor, 80,900 voted against, and 9,275 shares not voted due to broker abstentions.
 
Proposition 3 - Adjournment of Meeting to Solicit Additional Votes.
 
Proposition 3 passed by a vote of 11,110,072 shares voted in favor, 63,677 shares voted against, and 7,975 shares not voted due to broker abstentions.
 
No other business was transacted at the meeting.
 

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

The Company is presently traded on the OTC Bulletin Board under the symbol AMAR. The range of high and low bids as quoted on the OTC Bulletin Board for each quarter of 2006 and 2005 was as follows:
 
2006
2005
Quarter
High
Low
High
Low
First
$1.71
$0.42
$0.58
$0.29
Second
1.50
0.80
0.45
0.31
Third
0.89
0.66
0.38
0.27
Forth
0.82
0.46
0.61
0.27

The quotations reflect inter-dealer bids without retail markup, markdown, or commission, and may not represent actual transactions. As of December 31, 2006, the Company had approximately 1,495 shareholders of record.

During 2006 there were 22 sales of the unregistered common stock of the Company by private placement, raising $1,550,085 in cash. Of those purchases, 3 were by individuals who were not accredited investors within the meaning of Rule 501 of Regulation D, promulgated under the U.S. Securities Act of 1933, and 19 purchases were made by accredited investors. Of these sales, 671,300 shares were sold for $0.20 per share; 200,000 shares were sold for $0.38 per share; 33,617 shares were sold for $0.47 per

12

share; 600,000 shares were sold for $0.52 per share; and 1,840,000 shares were sold for $0.55 per share. The foregoing private placements were conducted in reliance on Rule 506, promulgated under Section 4(2) of the Securities Act of 1933.

ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The following discussion should be read in conjunction with our financial statements and the notes thereto which appear elsewhere in this report. The results shown herein are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements based on current expectations, which involve uncertainties. Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors. Readers should also carefully review factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission.

Overview

The Company continues to engage in research and development activities focused on developing biologics for the treatment of human and animal diseases. The Company has not commenced any significant product commer-cialization and, until such time as it does, will not generate significant product revenues. The Company’s accumulated deficit has increased, from approximately $23,176,217 at December 31, 2005 to $25,953,878 at December 31, 2006. Operating losses are expected to continue for the foresee-able future and until such time as the Company is able to attain sales levels sufficient to support its operations.

In 2007 the Company will continue its research and development activities, as well as the activities necessary to develop commercial partnerships and licenses. The Company’s expenditure of financial resources in 2007 will fall princi-pally into five broad categories, as follows: Research and Development; Personnel; Consulting and Professional (except legal and accounting); Legal and Accounting; and Public Relations, Investor Relations and Shareholder Relations.
 

Liquidity and Capital Resources

At December 31, 2006, the Company had available cash of $213,844, and had a working capital deficit of ($2,505,868). Assuming there is no decrease in current accounts payable, and accounting for various one-time expenses, the Company’s negative cash flow for operating activities plus equipment purchases, patent filings, and payoff of a note (burn rate) is approximately $132,700 per month. The Company’s continued losses and lack of liquidity indicate that the Company may not be able to continue as a going concern for a reasonable period of time. The Company’s ability to continue as a going concern is dependent upon several factors including, but not limited to, the Company’s ability to generate sufficient cash flow to meet its obligations on a timely basis, obtain additional financing and continue to obtain supplies and services from its vendors. The Company will need to raise additional funds in order to fully execute its 2007 Plan. The Company is presently negotiating with human health commercial development partners in
 

13

various regions of the world including South America and Southeast Asia. The Company believes that one or more of these agreements will be executed during 2007. These agreements could generally include provisions for the commercial partner to pay ABI a technology access fee, could include payments for a portion of the clinical trial expenses, could include payment obligations to ABI upon the accomplishment of certain defined tasks and/or could provide for payments relating to the future sales of commercial product. These agreements could be an important source of funds for ABI. However, there can be no assurance that the Company will be successful in obtaining additional funding from human health commercial development partners or private investors. If the Company is not successful in raising additional funds, it will need to significantly curtail clinical trial expenditures and to further reduce staff and administrative expenses and may be forced to cease operations.
 
Total outstanding current liabilities stayed approximately the same with approximately $2.8 million at December 31, 2006, as compared to approximately $2.6 million at December 31, 2005.

ITEM 7. FINANCIAL STATEMENTS. 

The financial statements of the Company are set forth beginning on page F-1 immediately following the signature page of this report.

Critical Accounting Policies
 
We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our financial statements:

Accounting for Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised), "Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective approach. Prior to the adoption of SFAS 123(R) we accounted for stock option grant in accordance with APB Opinion No. 25,” Accounting for Stock Issued to Employees," and accordingly, recognized compensation expense for stock option grants using the intrinsic value method.

Under the modified prospective approach, SFAS 123(R) applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled.  Under the modified prospective approach, compensation cost recognized in the first quarter of fiscal 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original  provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent  to January 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).  For all quarters after the first quarter of fiscal 2006, compensation costs recognized will include compensation costs for all share-based payments granted based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).


14

Comparison of results for the fiscal year ended December 31, 2006, to the fiscal year ended December 31, 2005.

Revenues. During the fiscal year ended December 31, 2006, $3,934 from product sales was generated compared to revenues from product sales for the fiscal year ended December 31, 2005, of $42,730, a decrease of $38,796 or approximately 91%. The decrease is primarily due to lack of sales of interferon products in 2006.

Selling, General and Administrative Expenses. Selling, General and Administrative expenses of $2,288,045 were incurred for the fiscal year ended December 31, 2006, compared to $492,659 for the fiscal year ended December 31, 2005, an increase of $1,795,386. The majority of this increase is a result of option and warrant recognition. In 2006, the Company recognized the following non-cash expenses utilizing the Black Scholes option-pricing model: $737,863 for stock options and warrants issued to consultants and $113,655 for stock options issued to employees. In addition, the Company recognized a $216,000 non-cash expense for stock granted to an employee.

Non-Cash Consulting Activities. During the year ended December 31, 2006, the Board of Directors authorized the issuance of 87,309 shares of restricted common stock to various consultants in lieu of cash payments. Based upon the common stock trading price at the times of issuance, and FASB rules, a non-cash consulting expense of $49,835 was recorded for the issuance of these shares during the year ended December 31, 2006. During 2006, the Company issued 945,500 options to consultants and 1,200,000 options to employees, and recognized expense of $851,518 relating to the vested portion of these option grants.
 
In the second quarter, 250,000 options were exercised for $0.10 per share, generating $25,000 in cash. The rest of the options and warrants have not been exercised.
 
Net Income (Loss). Net Loss applicable to common shareholders for the fiscal year ended December 31, 2006 was $2,777,661 compared to a Net Loss of $669,011 for the fiscal year ended December 31, 2005.
 
RISK FACTORS
 
You should carefully consider the risks described below before making an investment in Amarillo Biosciences, Inc.  All of these risks may impair our business operations.  If any of the following risks actually occurs our business, financial condition or results of operations could be materially adversely affected.  In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.  
 
Risks Relating to our Business
 
We may not be able to adequately protect and maintain our intellectual property.
 
Our success will depend in part on our ability to protect and maintain our patents, intellectual property rights and licensing arrangements for our products and technology. No assurance can be given that licenses or rights used by Amarillo Biosciences, Inc. will not be challenged, infringed or circumvented,

15

or that the rights granted thereunder will provide competitive advantages to us. Furthermore, there can be no assurance that we will be able to remain in compliance with our existing or future licensing arrangements. Consequently, there may be a risk that licensing arrangements are withdrawn with no penalties to the licensee or compensation to Amarillo Biosciences, Inc.
 
We rely on third parties for the supply, manufacture and distribution of our products.
 
Third parties manufacture and distribute all of our products. We do not currently have manufacturing facilities or personnel to independently manufacture our products. Currently, Marlyn Nutraceutical manufactures our nutraceutical products. Our licensed distributors, in the United States and Internationally distribute the nutraceutical products. Except for any contractual rights and remedies that we may have with our manufacturer and our distributor, we have no control over the availability of our products, their quality or cost or the actual distribution of our products. If for any reason we are unable to obtain or retain third-party manufacturers and distributors on commercially acceptable terms, we may not be able to produce and distribute our products as planned. If we encounter delays or difficulties with our contract manufacturer in producing or packaging our products or with our distributor in distributing our products, the production, distribution, marketing and subsequent sales of these products would be adversely affected, and we may have to seek alternative sources of supply or distribution or abandon or sell product lines on unsatisfactory terms. We may not be able to enter into alternative supply, production or distribution arrangements on commercially acceptable terms, if at all. There can be no assurance that the manufacturer that we have engaged will be able to provide sufficient quantities of these products or that the products supplied will meet with our specifications or that our distributor will be able to distribute our products in accordance with our requirements.
 
We are dependant on certain key existing and future personnel.
 
Our success will depend, to a large degree, upon the efforts and abilities of our officers and key management employees such as Joseph M. Cummins, our President and Chief Executive Officer, Gary W. Coy, our Chief Financial Officer, and Martin J. Cummins, our Vice President of Clinical and Regulatory Affairs. The loss of the services of one or more of our key employees could have a material adverse effect on our operations. We do currently have employment agreements with our executive officers. We do not currently maintain key man life insurance on any of our key employees. In addition, as our business plan is implemented, we will need to recruit and retain additional management and key employees in virtually all phases of our operations. We cannot assure that we will be able to successfully attract and retain key personnel.
 
Our growth is dependent on our ability to successfully develop, acquire or license new drugs.
 
We must invest substantial time, resources and capital in identifying and developing new drugs, dosage and delivery systems, either on our own or by acquiring and licensing such products from third parties. Our growth depends, in part, on our success in such process. Our planned expansion over time is founded on a simple principal of introducing two new products or line extensions each year and to expand distribution into two new territories each year. This strategy has the advantage of building brands through geographic expansion and line extensions, and establishing incremental capabilities for new product introductions. We believe that our planned expansion will require $5.0 million in total over two years, which
 

16

we intend to fund out of our future revenues and additional financing. If we are unable to either develop new products on our own or acquire licenses for new products from third parties, our ability to grow revenues and market share will be adversely affected. In addition, we may not be able to recover our investment in the development of new drugs, given that projects may be interrupted, unsuccessful, not as profitable as initially contemplated or we may not be able to obtain necessary financing for such development if we are unable to fund such development from our future revenues. Similarly, there is no assurance that we can successfully secure such rights from third parties on an economically feasible basis.
 
We may be subject to product liability claims in the future.
 
We face an inherent business risk of exposure to product liability claims in the event that the use of our technologies or products is alleged to have resulted in adverse side effects. Side effects or marketing or manufacturing problems pertaining to any of our products could result in product liability claims or adverse publicity. These risks will exist for those products in clinical development and with respect to those products that receive regulatory approval for commercial sale. Even though we have not historically experienced any problems associated with claims by users of our products, we do currently maintain product liability insurance.
 
Risks Relating to Ownership of Common Stock.
 
There may not be sufficient liquidity in the market for our securities in order for investors to sell their securities.
 
There is currently only a limited public market for our common stock, which is listed on the Bulletin Board, and there can be no assurance that a trading market will develop further or be maintained in the future.
 
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None.
 
 
ITEM 8A. CONTROLS AND PROCEDURES.
 
As of December 31, 2006, the disclosure controls and procedures in place have been evaluated and are sufficient to ensure the accurate and full disclosure of financial matters.
 
The management of the Company is responsible for establishing and maintaining adequate internal controls over the financial reporting of the Company. The Company uses the following framework to evaluate the effectiveness of the internal controls over financial reporting:
 
We maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion.
 

17

In the ordinary course of business, we review our system of internal control over financial reporting and make changes to our systems and processes to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems and automating manual processes.
 
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
 
Management has concluded that internal control over financial reporting was effective as of December 31, 2006. The Company’s accounting firm has not issued an attestation report on the management’s assessment of the Company’s internal controls. No material changes to the Company’s internal controls were made in 2006 and no material weaknesses in such controls were found.
 

 
PART III
 
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
 
As of December 31, 2006, the directors and executive officers of the Company were as follows:
 
Name
 
 
Age
 
 
Position
 
Joseph M. Cummins, DVM, PhD (1)
64
Chairman of the Board, President, Chief Executive Officer and Director
Gary W. Coy, PhD
62
Vice President and Chief Financial Officer
Martin J. Cummins
39
Vice President of Clinical & Regulatory Affairs
Stephen Chen, PhD (2)(3)(4)
57
Director
Thomas D’Alonzo (1)(2)(4)
63
Director
Dennis Moore, DVM (1)(4)
60
Director
James Page, MD (2)(3)
79
Director
Thomas Ulie (1)(3)
58
Director

(1) Member of the Executive Committee.
(2) Member of the Compensation & Stock Committee.
(3) Member of the Audit Committee.
(4) Member of the Search Committee.
.


18

Joseph M. Cummins has been the Chairman of the Board of the Company since he founded it in June 1984. Dr. Cummins has also served as President of the Company since December 1994. Dr. Cummins has been conducting research on oral cytokines, most particularly interferon alpha, in animals and humans for 30 years. Dr. Cummins has more than 40 publications and a dozen patents that reflect his work in the field of oral interferon. He received a PhD degree in microbiology from the University of Missouri in 1978 and a doctor of veterinary medicine degree from the Ohio State University in 1966.
 
Gary W. Coy provided financial consulting services to the Company since 2004 and has been the Chief Financial Officer since April 2006. Previously, Dr. Coy was Chairman and President of multiple companies including Lighthouse Properties, Inc., a real estate partnership syndicator and property management company, and Poly-Drug, Inc., a toxicology and therapeutic drug monitoring medical laboratory that he founded, financed, developed and sold to a publicly traded company. Dr. Coy has a PhD (Chemistry), an M.B.A. (Finance) and an A.M. (Chemistry) from Boston University as well as a B.S. from the University of Iowa. 
 
    Martin J. Cummins has held several positions within the Company since joining the Company full-time in June 1992. Mr. Cummins currently oversees all research studies involving human participants as Vice President of Clinical and Regulatory Affairs. Mr. Cummins has received extensive training in the fields of clinical trial design, monitoring and analysis, as well as regulatory affairs and compliance and has 11 publications to reflect his work. He received a Bachelor of Sciences degree in microbiology from Texas Tech University. He is the son of Joseph Cummins.
 
Stephen Chen has been a director of the Company since February 1996. He has been President and Chief Executive Officer of STC International, Inc., a health care investment firm, since May 1992. From August 1989 to May 1992 he was Director of Pharmaceutical Research and Development for the Ciba Consumer Pharmaceuticals Division of Ciba-Geigy.
 
Thomas D’Alonzo has been a director of the Company since June 2006. Mr. D’Alonzo is a seasoned executive with experience in all major facets of pharmaceutical operations: sales and marketing, manufacturing, quality assurance, finance and licensing and strategic planning. Mr. D’Alonzo served as President of Pharmaceutical Product Development, Inc., a multi-national clinical research organization with 3,000 employees operating in 14 countries and generating $300 million in revenues from analytical labs and Phase 1, 2, 3 and 4 clinical trials.  Previously, Mr. D’Alonzo was President of Genevec, Inc., a gene therapy biotech company. Before that, Mr. D’Alonzo was President of Glaxo, Inc., the US unit of what is now Glaxo SmithKline.
 
Dennis Moore has been a director of the Company since 1986. Dr. Moore has been a doctor of veterinary medicine since 1972 and was in private practice from 1972 to 1995. Since 1995, Dr. Moore has been involved in managing his personal investments.
 
James Page has been a director of the Company since February 1996. Prior to retiring in 1991 as a Vice President with Adria Laboratories, Inc., a pharmaceutical company specializing in therapy given to cancer and AIDS patients, Dr. Page held various upper management level positions with Carter Wallace, Inc., Merck Sharpe & Dohme Research Laboratories and Wyeth Laboratories.

19

Thomas Ulie has been a director of the Company since June 2006. Mr. Ulie, a Chartered Financial Analyst, has been in the investment field for more than 30 years, and is currently CEO of First Island Capital, Inc., a West Coast-based NASD broker-dealer firm. Mr. Ulie also serves as a director of a number of medical companies and has wide-ranging experience in the investment community, having worked in investment banking, money management and research. Prior to First Island Capital, Mr. Ulie was a Senior Managing Director for the Stanford Company, a NYSE member firm.  Prior to that, Mr. Ulie was an Associate Director of Bear Stearns.
 
The Company’s directors are elected at the annual meeting of shareholders to hold office until the annual meeting of shareholders for the ensuing year or until their successors have been duly elected and qualified. Directors receive compensation of $1,000 per day and are reimbursed for any out-of-pocket expenses in connection with their attendance at meetings. In the event of the voluntary termination of a recipient’s association with the Company as a director, the options must be exercised within 90 days after such termination, and in the event they are not so exercised, will lapse.
 
Officers are elected annually by the Board of Directors and serve at the discretion of the Board.
 
Audit Committee Financial Expert
 
Mr. Thomas Ulie qualifies as an audit committee financial expert for the Company. An audit committee financial expert is a person who has an understanding of GAAP and financial statements; the ability to assess accounting and financial principles in connection with the accounting of the Company; experience preparing, auditing, analyzing, or evaluating financial statements; an understanding of internal controls over financial reporting; and an understanding of audit committee functions.
 
Code of Ethics
 
The Company’s Code of Ethics may be found on the Company’s website, www.amarbio.com.
 
Compliance with Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires directors and officers of the Company and persons who own more than 10 percent of the Company’s common stock to file with the Securities and Exchange Commission (the “Commission”) initial reports of ownership and reports of changes in ownership of the common stock. Directors, officers and more than 10% shareholders are required by the Exchange Act to furnish the Company with copies of all Section 16(a) forms they file.
 
To the Company’s knowledge based solely on a review of the copies of such reports furnished to the Company, the following persons have failed to file, on a timely basis, the identified reports required by the Exchange Act during the most recent fiscal year:

20


Name and Principal Position
Number of Late Reports
Known Failures to File a Required Form
Dr. Joseph M. Cummins, Chairman of the Board, President and Chief Executive Officer
1
0
Dr. Gary W. Coy, Vice President and Chief Financial Officer
2
0
Mr. Martin J. Cummins, Vice President of Clinical and Regulatory Affairs
1
0
Stephen Chen, Director
1
0
Thomas D’Alonzo, Director
1
0
Dennis Moore, Director
1
0
Thomas Ulie, Director
1
0

ITEM 10. EXECUTIVE COMPENSATION.
 
The following table sets forth for the three years ended December 31, 2006 compensation paid by the Company to its Chairman of the Board, President and Chief Executive Officer and to its Vice President of Clinical and Regulatory Affairs as well as the compensation paid by the Company to its Vice President and Chief Financial Officer for the year ended December 31, 2006. Other compensation in 2006 consists of the fair value of a stock grant approved in the first quarter and issued in the second quarter of 2006.
 

Summary Compensation Table
       
 
Annual Compensation
Long Term Compensation
Name and Principal Position
  
Year
  
Salary
  
Bonus
  
Other Compen-sation
  
Securities Underlying Options
Dr. Joseph M. Cummins,
Chairman of the Board,
President and Chief
Executive Officer 
  
2006
  
$ 181,416
 
$ -
  
$ 216,000
  
400,000
   
2005
  
$ 177,000
  
$ -
  
$ -
  
600,000
   
2004
  
$ 74,716
  
$ -
  
$ -
  
650,000
Mr. Martin J. Cummins,
Vice President of Clinical
and Regulatory Affairs
 
2006
  
$ 97,866
  
$ -
  
$ -
  
400,000
   
2005
  
$ 84,878
  
$ -
  
$ -
  
500,000
   
2004
  
$ 33,299
  
$ -
  
$ -
  
150,000
Dr. Gary W. Coy,
Vice President and Chief
Financial Officer
  
2006
  
$ 88,542
 
$ -
  
$ -
  
400,000

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Option Grants in 2006

The following table sets forth certain information relating to options granted in 2006 to the executive officers named above, to purchase shares of common stock of the Company.
Name
  
Number of Shares of Common Stock Underlying Options
Granted (#)
  
% of Total
Options Granted
to Employees
in 2006
  
Exercise or Base Price
($/Sh)
  
Expiration
Date
 
Joseph M. Cummins
  
100,000
  
8.3%
  
$0.85 (1)
  
09/09/2012
   
100,000
  
8.3%
  
$0.85 (1)
  
09/09/2013
   
100,000
  
8.3%
  
$0.85 (1)
  
09/09/2014
   
100,000
  
8.3%
  
$0.85 (1)
  
09/09/2015
Martin J. Cummins
  
100,000
  
8.3%
  
$0.85 (1)
  
09/09/2012
   
100,000
  
8.3%
  
$0.85 (1)
  
09/09/2013
   
100,000
  
8.3%
  
$0.85 (1)
  
09/09/2014
   
100,000
  
8.3%
  
$0.85 (1)
  
09/09/2015
Gary W. Coy
  
100,000
  
8.3%
  
$0.75     
  
03/31/2012
   
100,000
  
8.3%
  
$0.75     
  
03/31/2013
   
100,000
  
8.3%
  
$0.75    
 
03/31/2014
   
100,000
  
8.3%
  
$0.75    
 
03/31/2015

(1)  
The fair market value of the common stock on the date of the grant.

Aggregated Option Exercises at December 31, 2006
And Year-End Option Values
The following table sets forth information for the executive officers named above, regarding the exercise of options during 2006 and unexercised options held at the end of 2006.

Name
  
Number of Shares Acquired on
Exercise
  
Value
Realized
  
Number of Shares of Common Stock Underlying Unexercised Options at
December 31, 2006 Exercisable/Unexercisable
  
Value of Unexercised
In-The-Money Options at
December 31, 2006 (1) Exercisable/Unexercisable
Joseph M. Cummins
  
--
  
--
  
1,788,486
/
400,000
    
$1,162,516
/
None
Martin J. Cummins
  
--
  
--
  
799,000
  
400,000
    
$ 519,350
  
None
Gary W. Coy
  
--
  
--
  
None
/
400,000
    
None
/
None

(1)
Calculated based on the closing price of the common stock ($0.65) as reported by OTC BB on December 29, 2006.

22

Director Compensation for Last Fiscal Year

   
Cash Compensation
 
  
Stock Options
 
 
Name
 
  
 
Meeting Fees (1)
 
  
 
Consulting Fees (2)
 
  
 
Number of Securities Underlying Options
 
Stephen Chen, PhD
  
$ 2,000
 
$ --
  
--
Thomas D’Alonzo
  
$ 2,000
  
--
  
--
Dennis Moore, DVM
  
$ 2,000
 
--
  
--
James Page, MD
  
$ 2,000
 
--
  
--
Thomas Ulie
  
$ 2,000
  
--
  
--
 (1)
Directors receive $1,000 compensation for attendance at directors’ meetings.
(2)
Directors may receive up to $1,200 per day, prorated for partial days, for employment on special projects or assignments.

Employment agreements were executed with Joseph M. Cummins, Martin J. Cummins and Gary W. Coy during 2006.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
As of December 31, 2006, there were 24,476,767 shares of the Company’s common stock outstanding. The following table sets forth as of December 31, 2006, the beneficial ownership of each person who owns more than 5% of such outstanding common stock:
 
Name and Address
  
Amount and Nature of Beneficial Ownership
  
Percent of Class Owned
Hayashibara Biochemical Laboratories, Inc.
2-3 Shimoishii 1-chome
Okayama 700, Japan
  
3,118,655
 
  
13%
 


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The following table sets forth the beneficial ownership of the Company’s stock as of December 31, 2006 by each executive officer and director and by all executive officers and directors as a group:
 
Name and Address of Owner
Amount and Nature of Beneficial Ownership
  
Percent of Class Owned7
Joseph M. Cummins
7308 Ashland
Amarillo, TX 79119
  
2,256,0321
 
  
6.8%
 
Gary W. Coy
907 Cat Hollow Club Drive
Spicewood, TX 78669
  
300,741
 
  
0.9%
 
Martin J. Cummins
6615 Sandie
Amarillo, TX 79109
  
873,1482
 
  
2.6%
 
Dennis Moore
402 Fish Hatchery
Hamilton, MT 59840
  
920,7413
 
  
2.8%
 
Thomas D’Alonzo
908 Vance Street
Raleigh, NC 27608
  
41,1394
 
  
0.1%
 
Stephen Chen
Floor 7-1, No. 18
Xin Yi Road, Sec. 5
Taipei, Taiwan
  
827,6255
 
  
2.5%
 
James Page
103 Clubhouse Lane, #182
Naples, FL 34105
  
864,1256
 
  
2.6%
 
Thomas Ulie
P.O. Box 814
Mercer Island, WA 98040
  
671,300
 
  
2.0%
 
Total Group (all directors and executive officers - 8 persons)
  
6,754,851
  
20.3%

1 1,788,486 of these shares are exercisable options 
2 799,000 of these shares are exercisable options
3 814,125 of these shares are exercisable option
4 31,139 of these shares are exercisable options


5 794,125 of these shares are exercisable options
6 864,125 of these shares are exercisable options
7 Calculated based on 33,356,004 total shares outstanding and reserved


24



Employee Stock Option Plan
 
The Company has two employee stock option plans. The first is entitled the 1996 Employee Stock Option Plan, which has been approved by the shareholders of the Company, and which was amended and restated effective September 12, 1998, and May 11, 1999, both of said amendments and restatements also having been approved by the shareholders of the Company. 590,000 shares of the Company’s common stock are reserved for issuance under said Employee Stock Option Plan; however, none of such options are currently outstanding to employees of the Company. Options granted in prior years under the Employee Stock Option Plan have either lapsed, or have been exercised in full, or have been returned to the Company in exchange for non-qualified stock options. However, the Company may grant qualified stock options to employees under the 1996 Employee Stock Option Plan from time to time in the future.
 
The Company also has in place the 2006 Employee Stock Option and Stock Bonus Plan. This plan has authorized a maximum of 500,000 shares of the Company’s common stock to be issued or reserved. During 2006, 300,000 shares were issued under this plan to an employee of the Company. The plan shall remain in effect until the end of the Company’s fiscal year 2011. Options granted under the plan have a ten year term and become exercisable over a five year period. The option price is equal to 100% of the fair value of the common stock on the date of grant.
 
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
The Company has relied significantly on HBL, the largest shareholder of the Company, for a substantial portion of its capital requirements. Pursuant to the Development Agreement described at Item 1 of Part 1 above, HBL advanced $9,000,000 for funding of research. In addition, HBL has purchased substantial amounts of the Company’s common stock from time to time, to the point where it now owns 13% of the issued and outstanding shares of common stock of the Company. HBL loaned $1 million to the Company on November 30, 1999 and an additional $1 million on February 29, 2000, both loans bearing interest at 4.5% per annum. The November 30, 1999 loan has been extended until December 2007 and the February 29, 2000 loan has been extended to February 29, 2008. The aggregate balance on both notes at December 31, 2006, including principal and accrued interest, was $2,600,701. In addition to the above, HBL and the Company are parties to various license and manufacturing and supply agreements pursuant to which the Company licenses certain technology to or from HBL. HBL supplies formulations of its interferon alpha and other products to the Company. Additional information on these agreements is set forth in Notes 4 and 8 to the Financial Statements attached to this 10-KSB.
 
During 2006, the Company used the law firm of SandersBaker, P.C. Mr. Edward Morris, Secretary of the Company is a partner in that firm. The Company was invoiced $61,707 by said firm in 2006.
 
All future transactions and loans between the Company and its officers, directors and 5% shareholders will be on terms no less favorable to the Company than could be obtained from independent third parties. There can be no assurance, however, that future transactions or arrangements between the Company and its affiliates will be advantageous, that conflicts of interest will not arise with respect thereto or that if conflicts do arise, that they will be resolved in favor of the Company.
 

25

ITEM 13. EXHIBITS
 
EXHIBIT INDEX
 
3.1†
  
Restated Articles of Incorporation of the Company, dated June 22, 1999.
3.3*
  
Bylaws of the Company.
4.1*
  
Specimen Common Stock Certificate.
4.2*
  
Form of Underwriter's Warrant.
10.2*
  
License Agreement dated as of March 22, 1988 between the Company and The Texas A&M University System.
10.5*
  
Joint Development and Manufacturing/Supply Agreement dated March 13, 1992 between the Company and HBL, as amended.
10.7*
  
Japan Animal Health License Agreement dated January 20, 1993 between the Company and HBL.
10.11*
  
Manufacturing/Supply Agreement dated June 1, 1994 between the Company and HBL.
10.12*
  
Settlement Agreement dated April 27, 1995 among the Company, ISI, Pharma Pacific Management Pty. Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific Ltd. and Fernz Corporation Limited.
10.14*
  
PPM/ACC Sublicense Agreement dated April 27, 1995 between PPM and the Company.
10.18*
  
Form of Consulting Agreement between the Company and the Underwriter.
10.20†
  
1996 Employee Stock Option Plan, Amended and Restated as of May 11, 1999.
10.21†
  
Outside Director and Advisor Stock Option Plan, Amended and Restated as of May 11, 1999.
10.22*
  
Form of Indemnification Agreement between the Company and officers and directors of the Company.
10.23*
  
Indemnification Agreement between HBL and the Company.
10.26**
  
License Agreement dated July 22, 1997 between Hoffmann-La Roche, Inc. and the Company.
10.27**
  
Distribution Agreement dated January 12, 1998 between Global Damon Pharmaceutical and the Company.
10.28**
  
Distribution Agreement dated September 17, 1997 between HBL and the Company (tumor necrosis factor-alpha).
10.29**
  
Distribution Agreement dated September 17, 1997 between HBL and the Company (interferon gamma).
10.30***
  
Amendment No. 1 dated September 28, 1998 to License Agreement of March 22, 1988 between The Texas A&M University System and the Company.
10.36††
  
License Agreement dated February 1, 2000 between Molecular Medicine Research Institute and the Company (interferon gamma administered orally).
10.37†† a
  
License and Supply Agreement dated April 3, 2000 with Key Oncologics (Pty) Ltd. and the Company.

26


10.38††
  
Amendment No. 1 dated April 4, 2000, to Interferon Gamma Distribution Agreement dated September 17, 1997 between HBL and the Company (interferon gamma).
10.39†† a
  
License and Supply Agreement dated April 25, 2000 between Biopharm for Scientific Research and Drug Industry Development and the Company.
10.40†† a
  
Sales Agreement dated May 5, 2000 between Wilke Resources, Inc. and the Company.
10.41††
  
Engagement Agreement dated September 26, 2000 between Hunter Wise Financial Group, LLC and the Company.
10.42†† a
  
Supply Agreement (Anhydrous Crystalline Maltose) dated October 13, 2000 between Hayashibara Biochemical Laboratories, Inc. and the Company.
10.43†† a
  
Supply Agreement dated December 11, 2000 between Natrol, Inc. and the Company.
10.44††† a
  
License Agreement dated September 7, 2001 between Atrix Laboratories, Inc. and the Company.
10.45†††† a
  
Supply Agreement dated June 20, 2004 between Global Kinetics, Inc. and the Company.
10.46†††† a
  
License and Supply Agreement dated September 13, 2004 between Nobel ILAC SANAYII VE TICARET A.S. and the Company
10.47‡ a
  
License and Supply Agreement dated October 19, 2005 between Global Kinetics, Inc. and the Company.
10.48‡ a
  
License and Supply Agreement dated January 18, 2006, between Bumimedic (Malaysia) SDN. BHD., and the Company.
10.49‡‡ 
  
Employment Contract dated March 13, 2006, between Gary W. Coy and the Company.
10.50‡‡
  
Employment Contract dated September 10, 2006, between Joseph M. Cummins and the Company.
10.51‡‡
  
Employment Contract dated September 10, 2006, between Martin J. Cummins and the Company.
10.52‡‡ a
  
Supply Agreement (Anhydrous Crystalline Maltose) dated October 16, 2006 between Hayashibara Biochemical Laboratories, Inc. and the Company
10.53‡‡ a
  
License and Supply Agreement dated November 16, 2006, between CytoPharm, Inc. and the Company.


27

99.1 906 Certification
*The Exhibit is incorporated by reference to the exhibit of the same number to the Company's Registration Statement on Form SB-2 filed with and declared effective by the Commission (File No. 333-4413) on August 8, 1996.
**The Exhibit is incorporated by reference to the Company's 1997 Annual Report on Form 10-KSB filed with the Commission on or before March 31, 1998.
***The Exhibit is incorporated by reference to the Company's 1998 Annual Report on Form 10-KSB filed with the Commission on or before March 31, 1999.
† The Exhibit is incorporated by reference to the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1999, filed with the Commission on August 12, 1999 and subsequently amended on September 13, 1999.
†† The Exhibit is incorporated by reference to the Company's 2000 Annual Report on Form 10-KSB filed with the Commission on or before April 16, 2001.
††† The Exhibit is incorporated by reference to the Company's Report on Form 8-K filed with the Commission on September 24, 2001.
†††† The Exhibit is incorporated by reference to the Company's 2004 Annual Report on Form 10-KSB filed with the Commission on or before April 15, 2005.
‡ The Exhibit is incorporated by reference to the Company’s 2005 Annual Report on Form 10-KSB filed with the Commission on or before April 15, 2006.
‡‡ The Exhibit is incorporated by reference to the Company’s 2006 Annual Report on Form 10-KSB filed with the Commission on or before April 15, 2007.
aPortions of this exhibit have been omitted and filed separately with the commission.

 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The following summarizes the fees incurred by the Company during 2005 and 2006 for accountant and related services.
 
Audit Fees
 
2006
2005
LBB & Associates Ltd., LLP (formerly Lopez, Blevins, Bork & Assoc. LLP)
$28,050
$ 17,875

All Other Fees
 
None.
 
Accountant Approval Policy
 
Before an accountant is engaged by the Company to perform audit or non-audit services, the accountant must be approved by the Company’s Audit Committee.
 


28

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
AMARILLO BIOSCIENCES, INC.
 
Date:  March 16, 2007
By:     /s/  Joseph M. Cummins
Joseph M. Cummins, Chairman of the Board,
President, and Chief Executive Officer
 
Date:  March 16, 2007
By:    /s/  Gary W. Coy
Gary W. Coy, Vice President,
Chief Financial Officer
   

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
 
Title
 
 
Date
 
   /s/  Joseph M. Cummins
Chairman of the Board,
President, Director and
Chief Executive Officer
March 16, 2007
Joseph M. Cummins
  
   
 
   /s/  Stephen Chen
 
Director
 March 17, 2007
Stephen Chen
    
   /s/  James Page    
 
Director
  
March 16, 2007
James Page
    
 
   /s/  Dennis Moore
 
Director

  March 22, 2007
Dennis Moore
    
   /s/  Thomas D'Alonzo
 
Director
  
March 17, 2007
Thomas D’Alonzo
    
   /s/  Thomas Ulie
 
Director
  March 22, 2007
Thomas Ulie
    

Amarillo Biosciences, Inc.

Financial Statements
Year ended December 31, 2006



Contents

Report of Independent Registered Public Accounting Firm…………………………
F-1
   
   
Audited Financial Statements
  
   
   
Balance Sheet………………………………………………………………………...
F-2
   
Statements of Operations…………………………………………………………….
F-3
   
Statements of Stockholders’ Deficit…………………………………………………
F-4
   
Statements of Cash Flows……………………………………………………………
F-5
   
Notes to Financial Statements……………………………………………………….
F-6


F-1


Report of Independent Registered Public Accounting Firm

The Board of Directors
Amarillo Biosciences, Inc.

We have audited the accompanying balance sheet of Amarillo Biosciences, Inc. as of December 31, 2006, and the related statements of operations, stockholders' deficit and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of Amarillo Biosciences, Inc. as of December 31, 2006, and the results of their operations and their cash flows for each of the two years then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Company's recurring losses from operations, and the need to raise additional financing in order to execute its 2007 plan, raise substantial doubt about its ability to continue as a going concern. (Management's plans as to these matters are also described in Note 1.) The 2006 financial statements do not include any adjustments that might result from the outcome of this uncertainty.

LBB & Associates Ltd., LLP
Houston, Texas
February 26, 2007
F-2

Amarillo Biosciences, Inc.
Balance Sheet
December 31, 2006
Assets
        
Current assets:
        
Cash and cash equivalents
  
$
213,844
  
Other current assets
    
34,370
  
Total current assets
    
248,214
  
Property, equipment, and software, net of accumulated depreciation of $46,650
    
16,333
  
Patents, net of accumulated amortization of $204,169
    
125,870
  
Total assets
  
$
390,417
  
         
Liabilities and Stockholders' Deficit
        
Current liabilities:
        
Accounts payable and accrued expenses
 
$
153,381
  
Accrued interest - related party
    
600,701
  
Notes payable - related party
    
2,000,000
  
Total current liabilities
    
2,754,082
  
Total liabilities
    
2,754,082
  
         
Commitments and contingencies
        
Stockholders' deficit
        
Preferred stock, $.01 par value:
        
Authorized shares - 10,000,000
        
Issued shares - none
    
-
  
Common stock, $.01 par value:
        
Authorized shares - 50,000,000
        
Issued shares - 24,476,767
    
244,768
  
Additional paid-in capital
    
23,345,445
  
Accumulated deficit
    
(25,953,878
)
Total stockholders' deficit
    
(2,363,665
)
Total liabilities and stockholder's deficit
  
$
390,417
  


The accompanying notes are an integral part of these financial statements.

F-3

Amarillo Biosciences, Inc.
Statements of Operations

   
Year ended December 31,
  
     
2006
    
2005
  
Revenues:
              
Sales - Nutraceutical
  
$
3,934
  
$
42,730
  
Federal research grants
    
60,023
   
44,349
 
Sublicense fee revenue
    
69,985
   
67,486
 
Total Revenues
    
133,942
   
154,565
 
               
Operating Expenses:
              
Cost of sales
    
258
   
22,456
 
Research and development expenses
    
535,075
   
187,810
 
Selling, general and administrative expenses
    
2,288,045
   
492,659
 
Total Operating Expenses
    
2,823,378
   
702,925
 
               
Operating loss
    
(2,689,436
)
  
(548,360
)
               
Other income (expense)
              
Interest expense
    
(93,149
)
  
(120,651
)
Interest income
    
3,034
    
-
 
Investment income
    
1,890
   
-
 
Net income (loss)
  
$
(2,777,661
)
$
(669,011
)
               
Basic and diluted net income (loss) per share
  
$
(0.12
)
$
(0.04
)
               
Weighted average shares outstanding
    
22,479,399
   
16,495,678
 
 
The accompanying notes are an integral part of these financial statements.

 
F-4
Amarillo Biosciences, Inc.
Statements of Stockholders’ Deficit
Years Ended December 31, 2006 and 2005
 
 
    
Issuance Price 
  
Common Stock
Shares                   Amount    
 
Additional Paid in Capital
    
Accumulated Deficit
    
Total Stockholders' Deficit
  
Balance at December 31, 2004
          
14,385,296
  
$
143,853
  
$
19,669,145
  
$
(22,507,206
)
$
(2,694,208
)
                                       
Net loss for year ended December 31, 2005
          
-
   
-
   
-
   
(669,011
)
  
(669,011
)
Issuance of common stock for services
  
$
0.29-0.4467
    
37,994
   
380
   
12,832
   
-
   
13,212
 
Issuance of common stock for cash in private placements
    
0.20-0.22
    
4,928,700
   
49,287
   
800,702
   
-
   
849,989
  
Exercise of options for service
    
0.32-0.35
    
450,000
   
4,500
   
145,500
   
-
   
150,000
 
Issuance of warrants in connection with debt
          
-
   
-
   
20,105
   
-
   
20,105
 
Purchase and retirement of common stock
    
0.55
    
(120
)
  
(1
)
  
(65
)
        
(66
)
Balance at December 31, 2005
          
19,801,870
   
198,019
   
20,648,219
   
(23,176,217
)
  
(2,329,979
)
                                       
Net loss for year ended December 31, 2006
          
-
   
-
   
-
   
(2,777,661
)
  
(2,777,661
)
Fair value of options issued
                      
851,518
         
851,518
 
Exercise of options for cash
    
0.06-0.27
    
100,000
   
1,000
   
11,900
   
-
   
12,900
 
Exercise of options for services
    
0.10
    
250,000
   
2,500
   
22,500
   
-
   
25,000
 
Conversion and exercise of cashless options
          
547,216
   
5,472
   
(5,472
)
  
-
   
-
 
Issuance of common stock for cash in private placements
    
0.20-0.55
    
3,344,917
   
33,449
   
1,516,636
   
-
   
1,550,085
 
Issuance of common stock for services
    
0.433-1.6233
    
387,309
   
3,873
   
261,962
   
-
   
265,835
 
Issuance of common stock for debt
repayment
    
0.55
    
45,455
   
455
   
38,182
   
-
   
38,637
 
Balance at December 31, 2006
          
24,476,767
 
$
244,768
  
$
23,345,445
  
$
(25,953,878
)
$
(2,363,665
)

The accompanying notes are an integral part of these financial statements.

F-5

Amarillo Biosciences, Inc.
Statements of Cash Flows

 
December 31, 
   
2006
    
2005
  
Net loss
 
$
(2,777,661
)
$
(669,011
)
Adjustments to reconcile net loss to net cash
used for operating activities:
              
Depreciation and amortization
   
15,178
    
12,439
  
Common stock issued for services and
retirement of debt
    
279,473
    
150,712
  
Fair value of options issued
    
851,518
    
-
  
Issuance of warrants in connection with debt
    
-
    
20,105
  
Changes in operating assets and liabilities:
              
Other current assets
    
(31,583
)
  
(1,953
)
Accounts payable and accrued liabilities
    
111,868
    
(120,381
)
Accrued interest
    
90,000
    
(47,302
)
Net cash used in operating activities
   
(1,461,207
)
  
(655,391
)
               
Investing Activities
             
Purchase of property and equipment
   
(18,406
)
  
-
  
Patents
   
(19,343
)
  
-
  
Net cash used in investing activities
   
(37,749
)
  
-
  
               
Financing Activities
             
Proceeds from exercise of options
   
37,900
    
12,500
  
Repayments of notes payable
   
(68,500
)
  
(20,000
)
Purchase and retirement of common stock
   
-
    
(66
)
Issuance of common stock
   
1,550,085
    
849,989
  
Net cash provided by financing activities
   
1,519,485
    
842,423
  
Net increase (decrease) in cash
   
20,529
    
187,032
  
Cash and cash equivalents at beginning of period
   
193,315
    
6,283
  
Cash and cash equivalents at end of period
 
$
213,844
  
$
193,315
  
               
Supplemental Cash Flow Information
             
Cash paid for interest
 
$
3,149
  
$
36,967
  
Stock issued for debt repayment
 
$
25,000
  
$
-
  
 
The accompanying notes are an integral part of these financial statements.

F-6

Amarillo Biosciences, Inc.
Notes to Financial Statements
December 31, 2006


1. Organization and Summary of Significant Accounting Policies

Organization and Business

Amarillo Biosciences, Inc. (the "Company" or "ABI"), a Texas corporation formed in 1984, is engaged in developing biologics for the treatment of human and animal diseases. The Company is continuing its clinical studies as part of the process of obtaining regulatory approval from the United States Food and Drug Administration ("FDA"), so that commercial marketing can begin in the United States. The Company has developed a dietary supplement and an interferon alpha lozenge, but has not commenced any significant product commercialization activities.

Going Concern

The Company's viability is dependent upon successful commercialization of products resulting from its research and product development activities. The Company plans on working with commercial development partners in the United States and in other parts of the world to provide the necessary sales, marketing and distribution infrastructure to successfully commercialize the interferon alpha product for both human and animal applications. All of the Company's products will require significant additional development, laboratory and clinical testing and investment prior to the Company obtaining regulatory approval to commercially market its product(s). Accordingly, for at least the next few years, the Company will continue to incur research and development and general and administrative expenses and may not generate sufficient revenues from product sales to support its operations.

The Company has been dependent upon financing from its stockholders. The Company’s activities have been financed primarily through the issuance of common stock, and under an agreement with a major stockholder, and its initial public offering.

The Company’s 2007 plan of operations calls for the Company to expend approximately $2.2 million cash, excluding funding fees, in 2007. At December 31, 2006, the Company had available cash of $213,844 and negative working capital (current assets less current liabilities) of ($2,505,868). Current liabilities included two $1 million dollar notes and $600,701 accrued interest owed to Hayashibara Biochemical Laboratories, Inc. (“HBL”), the Company’s largest shareholder and benefactor. In the past, HBL has extended the notes and accrued interest for one year terms. The notes have been extended until December 3, 2007 and February 28, 2008, respectively.

F-7

1. Organization and Summary of Significant Accounting Policies (Continued)

Going Concern (Continued)

The Company’s continued losses and lack of liquidity indicate that the Company may not be able to continue as a going concern for a reasonable period of time. The Company’s ability to continue as a going concern is dependent upon several factors including, but not limited to, the Company’s ability to generate sufficient cash flows to meet its obligations on a timely basis, obtain additional financing and continue to obtain supplies and services from its vendors. The Company will need to raise additional funds in order to execute its 2007 plan.

The Company is presently negotiating with human health commercial development partners in various regions of the world including the United States, China, South America and Southeast Asia. The Company believes that one or more of these agreements will be executed during 2007. These agreements could generally include provisions for the commercial partner to pay ABI a technology access fee, could include payments for a portion of the clinical trial expenses, could include payment obligations to ABI upon the accomplishment of certain defined tasks and/or could provide for payments relating to the future sales of commercial product. These agreements could be an important source of funds for ABI. However, there can be no assurance that the Company will be successful in obtaining additional funding from either human health and animal health commercial development partners or private investors. If the Company is not successful in raising additional funds, it will need to significantly curtail clinical trial expenditures and to further reduce staff and administrative expenses and may be forced to cease operations.

Dissolution of Subsidiaries

Effective October 1, 2006, the following subsidiaries of the Company were dissolved with the State of Texas: ABI Taiwan Inc, Amarillo Cell of Canada Inc, Vanguard Biosciences Inc, Veldona Africa Inc, and Veldona Poland Inc. All the above subsidiaries have been inactive for the past several years with no revenues, expenses, assets or liabilities represented in the consolidated financial statements. The capital accounts of the above subsidiaries and the investment in subsidiaries by the Company were eliminated during 2006. No gain or loss was recognized on the dissolution of the above subsidiaries during 2006.

Fair Value of Financial Instruments

The Company's financial instruments consist of cash and cash equivalents, receivables and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.

F-8

1. Organization and Summary of Significant Accounting Policies (Continued)

Stock Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised), "Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective approach. Prior to the adoption of SFAS 123(R) we accounted for stock option grant in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees," and accordingly, recognized compensation expense for stock option grants using the intrinsic value method.

Under the modified prospective approach, SFAS 123(R) applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled.  Under the modified prospective approach, compensation cost recognized in the first quarter of fiscal 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original  provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent  to January 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).  For all quarters after the first quarter of fiscal 2006, compensation costs recognized will include compensation costs for all share-based payments granted based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).

The following illustrates the effect on net loss and net loss per share if Amarillo had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation prior to January 1, 2006.

For the year ended December 31,
    
2005
  
         
Net loss, as reported
  
$
(669,011
)
Less: stock based compensation determined
under fair value based method
    
(984,339
)
Pro-forma net loss
  
$
(1,653,350
)
         
Basic and diluted net loss per share:
        
As reported
  
$
(0.04
)
 

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of 0.0%, expected volatility of 134.0%, risk-free interest rate of 1.5% and expected life of 60 months.


F-9

1. Organization and Summary of Significant Accounting Policies (Continued)

Cash and Cash Equivalents

The Company classifies investments as cash equivalents if the maturity of an investment is three months or less.

Allowance for Doubtful Accounts

The Company establishes an allowance for doubtful accounts to ensure trade and notes receivable are not overstated due to uncollectibility. The Company’s allowance is based on a variety of factors, including age of the receivable, significant one-time events, historical experience, and other risk considerations. In 2006, the Company wrote off a $6,000 note receivable as bad debt as the note was deemed by management to be uncollectible. The balance of the allowance for doubtful accounts as of December 31, 2006 is $0.

Accounts and notes receivable amounted to $437 as of December 31, 2006, and are included with other current assets in the accompanying financial statements.

Inventory

Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. The Company continually assesses the appropriateness of inventory valuations giving consideration to slow-moving, non-saleable, out-of-date or close-dated inventory. As of December 31, 2006 the Company has $4,064 of inventory included in other current assets.

Property and Equipment

Property, equipment and software are stated on the basis of historical cost less accumulated depreciation. Depreciation is provided using the straight-line method over the two to five year estimated useful lives of the assets.

Patents; Patent Expenditures

ABI holds patent license agreements and holds patents that are owned by the Company. All patent license agreements remain in effect over the life of the underlying patents. Accordingly, the patent license fee is being amortized over 15-17 years using the straight-line method. Patent fees and legal fees associated with the issuance of new owned patents are capitalized and amortized over 15-17 years. Amortization expense amounted to $12,380 and $12,379 for the years ended December 31, 2006 and 2005, respectively.

F-10

1. Organization and Summary of Significant Accounting Policies (Continued)

Long-lived Assets

Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. No impairment losses have been recorded since inception.

Income Taxes

The asset and liability approach is used to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.

Revenue Recognition

Dietary supplement and interferon sales

Revenues for the dietary supplement sales are recognized when an arrangement exists, the price is fixed and it has been determined that collectibility is reasonably assured. This generally occurs at the point when the goods are shipped to the customer,

Federal research grant

The Company was awarded a research grant in May 2005 by the National Institute of Health, Small Business Innovation Research Program (“NIH”). The funded research was subcontracted to Ohio State University (“OSU”) by the Company. Revenue is recognized by the Company as earned and collectibility is reasonably assured. Revenue is earned under the grant with NIH as qualified research costs are incurred. Costs are recognized by the Company on an ongoing basis as incurred by OSU and invoiced to the Company.

Sublicense fee revenue

Sublicense revenue is calculated based on fees relating to a license. Amarillo recognizes revenue on these sublicense fees in the month the revenue is generated by the licensee.

F-11

1. Organization and Summary of Significant Accounting Policies (Continued)

Research and Development

Research and development costs are expensed as incurred.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Basic and Diluted Net Loss Per Share

Net loss per share is based on the number of weighted average shares outstanding. The effect of warrants and options outstanding (see Notes 7 and 8) is anti-dilutive.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash and accounts receivable.

The Company has cash balances in a single financial institution which, from time to time, exceed the federally insured limit of $100,000. As of December 31, 2006, the Company’s cash balance exceeded the federally insured limit by $113,844. No loss has been incurred related to this concentration of cash.

Other Concentrations

The Company and its sublicensees are reliant on a single, foreign supplier for its products. The loss of this supplier could adversely effect the Company’s future revenues.

F-12

1. Organization and Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007.  Management is currently evaluating the impact SFAS No. 157 will have on the Company’s financial position, results of operations, and cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB statement No. 115.” This Statement permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. If an entity elects the fair value option for a held-to-maturity or available-for-sale security in conjunction with the adoption of this Statement, that security shall be reported as a trading security under Statement 115, but the accounting for a transfer to the trading category under paragraph 15(b) of Statement 115 does not apply. Electing the fair value option for an existing held-to-maturity security will not call into question the intent of an entity to hold other debt securities to maturity in the future. This statement is effective as of the first fiscal year that begins after November 15, 2007. The Company is currently analyzing the effects of SFAS 159 but does not expect its implementation will have a significant impact on the Company's financial condition or results of operations.

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 Accounting for Uncertainly in Income Taxes - An Interpretation of FASB Statement No. 109.  FIN 48 prescribes detailed guidance for the financial statement recognition, measurement, and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes.  Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods.  FIN 48 will be effective for fiscal years beginning after December 15, 2006, and the provisions of FIN 48 will be applied to all positions upon the adoption of the Interpretation.  The cumulative effect of this applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year.  Management is currently evaluating the impact of FIN 48 on the financial statements but does not believe that its adoption will have a material effect on the Company’s financial position, results of operations, or cash flows.

F-13

1. Organization and Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements (Continued)

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach, as those terms are defined in SAB 108. The rollover approach quantifies misstatements based on the amount of the error in the current year financial statement, whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. If a Company determines that an adjustment to prior year financial statements is required upon adoption of SAB 108 and does not elect to restate its previous financial statements, then it must recognize the cumulative effect of applying SAB 108 in fiscal 2006 beginning balances of the affected assets and liabilities with a corresponding adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is effective for interim periods of the first fiscal year ending after November 15, 2006, and will be adopted by the Company in the first quarter of 2007. The Company does not expect the adoption of this interpretation to have an impact on its financial position or results of operations.

2. Property, Equipment and Software

Equipment is stated at cost and consists of the following at December 31, 2006:

Furniture and equipment
  
$
57,263
  
Software
    
5,720
  
     
62,983
  
Less: accumulated depreciation
    
46,650
  
   
$
16,333
  

Depreciation expense amounted to $2,798 and $60 for the years ended December 31, 2006 and 2005, respectively.

F-14

3. Notes Payable 

The Company had an unsecured loan agreement with HBL (July 22, 1999), which called for HBL to loan the Company $3,000,000 to be advanced in three installments. One of these three notes was converted into stock as described below. The annual interest rate on unpaid principal from the date of each respective advance was 4.5 percent, with accrued interest being payable at the maturity of the note. $1,000,000 was payable on or before December 3, 2005, or on or before the expiration of one (1) year after approval of the Company’s product by the FDA, whichever occurs first. This note has been extended and is payable on or before December 3, 2007, or on or before the expiration of one (1) year after approval of the Company's product by the FDA, whichever occurs first. The other $1,000,000 is due on or before February 28, 2008, or on or before the expiration of one year after approval of the Company’s product by the FDA, whichever occurs first.

On September 30, 1999, the Company entered into an agreement to convert debt with HBL regarding the above described note payable to HBL in the then principal amount of $1,000,000, the first loan installment having by then been advanced. On October 15, 1999, pursuant to the agreement to convert debt, HBL canceled the then note balance in exchange for 1,111,831 shares of common stock of the Company valued at the then market value of $0.9044 per share. This stock conversion leaves the Company owing HBL a principal amount of $2,000,000 plus accrued interest.


4. Manufacturing and Supply Agreements

The Company was a party to the following manufacturing and supply agreements at December 31, 2006:

The Company has a joint development and manufacturing/supply agreement with HBL (the Development Agreement), a major stockholder under which HBL will formulate, manufacture and supply HBL interferon for the Company or any sublicensee. In exchange, HBL is entitled to receive a transfer fee, specified royalties and a portion of any payment received by the Company for sublicense of rights under this agreement. The agreement further provides that the Company sublicense to HBL the right to market HBL interferon for oral use in humans and in non-human, warm-blooded species in Japan, in exchange for the Company receiving a royalty fee based on net sales. The Company is the exclusive agent for the development of HBL interferon for non-oral use in humans and in non-human, warm-blooded species in North America, in exchange, HBL is entitled to receive a transfer fee based on units of interferon supplied and the agreement also provides that a royalty fee be paid to HBL.


F-15
4. Manufacturing and Supply Agreements (Continued)

As part of the license agreement with Atrix Laboratories, Inc. (executed September 7, 2001, terminated May 22, 2003) a second amendment to the Development Agreement was executed extending the Development Agreement to March 12, 2005 and will be renewed automatically for successive three-year terms. The current expiration date of the Development Agreement is March 12, 2008.

The Company has a supply agreement with HBL under which the Company gained an exclusive right to purchase and distribute anhydrous crystalline maltose for the treatment of dry mouth (xerostomia). This exclusive supply agreement is worldwide, excluding Japan.

5. License and Sublicense Agreements

The Company holds patent rights for which the Company has paid certain license fees under three license agreements. Under these agreements, the Company will pay the licensor a portion of any sublicense fee received by the Company with respect to the manufacturing, use or sale of a licensed product, as well as a royalty fee based on the net selling price of licensed products, subject to a minimum annual royalty.

A $7,500 minimum cash royalty was paid by the Company to Texas A&M University System during 2006. A $19,992 sublicense fee payable to HBL was included in accounts payable at the end of 2006 based on sublicense fee income earned by the Company during the year. The Company has also entered into various sublicense agreements under which the Company is entitled to receive royalties based on the net sales value of licensed products.

6. Research Agreements

The Company contracts with third parties throughout the world to conduct research including studies and clinical trials. These agreements are generally less than one year in duration.

7. Common and Preferred Stock

The Company has 50,000,000 shares of voting common shares authorized for issuance and 10,000,000 shares of preferred stock authorized for issuance which is issuable in series. To date, no preferred stock has been issued.

The Company has 8,879,237 shares of common stock reserved for issuance upon exercise of options and warrants granted.

During 2006, the Company sold 3,344,917 unregistered shares of its voting common stock in private placement offerings. Of these sales, 671,300 shares were sold for $0.20 per share; 200,000 shares

F-16

7. Common and Preferred Stock (Continued)

were sold for $0.38 per share; 33,617 shares were sold for $0.47 per share; 600,000 shares were sold for $0.52 per share; and 1,840,000 shares were sold for $0.55 per share: generating $1,550,085 in cash.

During 2006, the Board of Directors authorized the issuance of 87,309 shares of restricted common stock to consultants in lieu of cash payments. Based upon the common stock trading price at the times of issuance, and FASB rules, a non-cash consulting expense of $49,835 was recorded for the issuance of these shares during the year ended December 31, 2006.

The Company recognized $216,000 (fair value) of expense in connection with the February 2006 grant of 300,000 shares of stock to an employee of the Company.  The certificate was issued in May 2006.

In July 2006, the Company applied the balance of a $25,000 note payable towards the purchase of 45,455 shares of restricted common stock. Because the exchange ratio assumed a discounted share price, the Company recorded at loss on retirement of debt in the amount of $13,637 in conjunction with this transaction.

During the years ended December 31, 2006 and 2005, finder’s fees paid related to private placements of stock totaled $120,850 and $9,901, and are included as general and administrative expenses in the accompany statements of operations.

8. Stock Options and Warrants

The Company has three stock option plans: the 1996 Employee Stock Option Plan (1996 Employee Plan), the 2006 Employee Stock Option and Stock Bonus Plan (2006 Employee Plan) and the Outside Director and Advisor Stock Option Plan (Director Plan).

The 1996 Employee Plan has authorized the grant of options to employees for up to 590,000 shares of the Company’s common stock. All options granted have five to ten year terms and become exercisable over a four to five year period. The option price is equal to 100% to 110% of the fair value of the common stock on the date of grant depending on the percentage of common stock owned by the optionee on the grant date.

The 2006 Employee Plan has authorized a maximum of 500,000 shares of the Company’s common stock to be issued or reserved. During 2006, 300,000 shares under this plan were issued to an employee of the Company. The plan shall remain in effect until the end of the Company’s fiscal year 2011. Options granted under the plan have a ten year term and become exercisable over a five year period. The option price is equal to 100% of the fair value of the common stock on the date of grant.

F-17


8. Stock Options and Warrants (Continued)

The Director Plan allows options to purchase a maximum of 410,000 shares of the Company's common stock to be granted to outside directors and scientific advisors to the Company at an exercise price equivalent to 100% of the fair market value of the common stock on the date of grant. These are ten-year options and become exercisable over a period of five years.

During 2005, the Company did not recognize any expense for stock options issued to directors, consultants, and scientific advisors. During 2006, the Company issued 945,500 options to consultants to purchase restricted common stock in exchange for consulting services and recognized $737,862 expense related to these options.

During 2006, the Company issued 1,200,000 options to employees of the Company. These options vest over the next four years. The Company recognized $113,656 expense related to these options. The remaining cost expected to be recognized if these options vest is $861,665.

During 2006, a former Director received 547,216 shares of common stock from the cashless exercise of 864,125 options. The stock is restricted from selling for one year.

A consultant exercised 250,000 options at $0.10 per share for services. A Board member exercised 20,000 options at $0.27 per share. An investor exercised 30,000 warrants at $0.15 per share and 50,000 warrants at $0.06 per share.

A summary of the Company's stock option activity and related information for the years ended December 31 is as follows:
   
2006
2005
 
     Options     
Price
    
Options
    
Price
  
Outstanding Beg of Year
    
6,845,862
  
$
0.06-5.00
    
2,925,862
  
$
0.06-5.00
  
Granted
    
2,725,500
    
0.10-0.87
    
3,920,000
    
0.40-0.40
  
Cancelled
    
23,000
    
0.42-5.00
    
-
    
-
  
Exercised
    
1,134,125
    
0.10-0.51
    
-
    
-
  
Outstanding End of Year
    
8,414,237
    
0.06-4.00
    
6,845,862
    
0.06-5.00
  
Exercisable End of Year
    
6,334,237
    
0.06-4.00
    
6,845,862
    
0.06-5.00
  

Exercise prices for options outstanding as of December 31, 2006 ranged from $0.06 to $4.00. Of these options, 5,000 have an exercise price of $4.00 and the remainder range from $0.06 to $0.87. The weighted-average remaining contractual life of those options is 5.21 years.


F-18

8. Stock Options and Warrants (Continued)

A summary of the Company's stock warrant activity and related information for the years ended December 31 is as follows:
   
2006
2005
 
     Warrants     
Price Range
    
Warrants
    
Price Range
  
Outstanding Beg of Year
    
357,000
  
$
0.06-1.75
    
387,900
  
$
0.06-3.75
  
Granted
    
300,000
    
0.20-2.00
    
135,000
    
0.22-0.50
  
Cancelled
    
112,000
    
1.75
    
165,900
    
0.40-3.75
  
Exercised
    
80,000
    
0.06-0.15
    
-
    
-
  
Outstanding End of Year
    
465,000
    
0.20-2.00
    
357,000
    
0.06-1.75
  
Exercisable End of Year
    
465,000
    
0.20-2.00
    
357,000
    
0.06-1.75
  

The weighted-average remaining contractual life of the warrants outstanding at December 31, 2006 is 2.57 years.

9. Employee Benefit Plan

The Company has a simplified employee pension plan (the Plan), which is a contributory plan that covers all employees of the Company. Contributions to the Plan are at the discretion of the Company. The plan expense for the years ended December 31, 2006 and 2005, were $0, and $0, respectively.

10. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. The Company’s deferred tax asset of approximately $7,800,000 and $6,989,000 at December 31, 2006 and 2005 respectively, was subject to a valuation allowance of $7,800,000 and $6,989,000 at December 31, 2006 and 2005 respectively, because of uncertainty regarding the Company’s ability to realize future tax benefits associated with the deferred tax assets. Deferred tax assets were comprised primarily of net operating loss carryovers under the cash method of accounting used by the Company for federal income tax reporting.

At December 31, 2006, the Company has net operating loss carryforwards of approximately $23,000,000 for federal income tax purposes expiring in 2007 through 2026. The ability of the Company to utilize these carryforwards may be limited should changes in stockholder ownership occur.

The difference between the reported income tax provision and the benefit normally expected by applying the statutory rate to the loss before income taxes results primarily from the inability of the Company to recognize its tax losses.

F-19

11. Commitments and Contingencies

Lease commitment

During 2006, the Company entered into an operating lease agreement for its offices in Amarillo, TX. The lease is for a period of 24 months commencing in January 2007. Minimum lease payments under this operating lease are $22,200 for 2007 and 2008. The Company has no material lease obligations beyond December 2008.

Rent expense recognized under its previous lease agreement during the years ended December 31, 2005 and 2004 amounted to $11,700 and $11,640, respectively.

Minimum Royalties

The agreement with Texas A&M University requires the Company to make minimum annual royalty payments of $7,500 through 2019.

Clinical Trial Costs

Six clinical investigation sites are participating in an oral interferon treatment of oral warts in HIV+ patients FDA Phase 2 study in San Francisco, Chicago, Dallas, Baltimore, Boston and New York. Two or more additional sites may be registered. The Company estimates the clinical trial costs for the oral warts Phase 2 study to be approximately $335,000 in 2007.

Litigation

The Company is not a party to any litigation and is not aware of any pending litigation or unasserted claims or assessments as of December 31, 2006.

12. Related Party Transactions

The Company has relied significantly on HBL, the largest shareholder of the Company, for a substantial portion of its capital requirements. Pursuant to the Development Agreement previously described, HBL advanced $9,000,000 for funding of research. In addition, HBL has purchased substantial amounts of the Company’s common stock from time to time, to the point where it now owns 13% of the issued and outstanding shares of common stock of the Company.

HBL and the Company are parties to various license and manufacturing and supply agreements pursuant to which the Company licenses certain technology to or from HBL. HBL supplies formulations of its interferon alpha and other products to the Company at contractual prices. The Company pays HBL a 12% royalty on the first $100 million of interferon alpha net sales and a 10%

F-20

12. Related Party Transactions (Continued)

royalty on additional net sales. Additionally, the Company is obligated to pay HBL a percentage of sublicense fee income the Company receives. There were no sales of interferon alpha and no royalty payments made to HBL in 2006. A $19,992 sublicense fee to HBL was recorded in 2006.

During 2006 and 2005 the Company purchased $8,240 and $2,410 of interferon alpha and other products from HBL, respectively. At December 31, 2006 and 2005 the Company did not have any outstanding amounts owed to HBL for purchases of interferon alpha or other products.

During 2006 the Company engaged the law firm of SandersBaker, P.C.. Mr. Edward Morris, Secretary of the Company, is a partner in that firm. The Company was invoiced $61,707 during 2006 for legal services rendered by SandersBaker.

13. Subsequent Events (Unaudited)

Since December 31, 2006, the Company has sold 998,000 shares of unregistered stock for $0.45 per share in private placement offerings; generating cash of $449,100.

EX-31.1A 2 exhibit31-1a123106.htm EXHIBIT 31.1A 123106 Exhibit 31.1A 123106
Exhibit 31.1a
FORM OF CERTIFICATION
PURSUANT TO RULE 13a-14 AND 15d-14
 
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
 
CERTIFICATION
 
I, Joseph M. Cummins, certify that:
 
1. I have reviewed this annual report on Form 10-KSB of Amarillo Biosciences, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

 
Date:  March 16, 2007           /s/ Joseph M. Cummins
                      Name: Joseph M. Cummins


 EX-31.1B 3 exhibit31-1b123106.htm EXHIBIT 31.1B 123106 Exhibit 31.1B 123106
Exhibit 31.1b
FORM OF CERTIFICATION
PURSUANT TO RULE 13a-14 AND 15d-14
 
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
 
CERTIFICATION
 
I, Gary W. Coy, certify that:
 
1. I have reviewed this annual report on Form 10-KSB of Amarillo Biosciences, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)  Deigned such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

 
Date:  March 16, 2007    /s/ Gary W. Coy
                  Name: Gary W. Coy
 EX-99.1 4 exhibit99-1_123106.htm EXHIBIT 99.1 123106 Exhibit 99.1 123106
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Amarillo Biosciences, Inc. on Form 10-KSB for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.



Date:  March 16, 2007           By: /s/ Joseph M. Cummins
Joseph M. Cummins
President, Chief Executive Officer

Date:  March 16, 2007           By: /s/ Gary W. Coy
Gary W. Coy
Vice President, Chief Financial Officer



 EX-10.49 5 exhibit10-49123106.htm EXHIBIT 10.49 123106 Exhibit 10.49 123106
Exhibit 10.49
EMLOYMENT CONTRACT

This Employment Contract (“Contract”) is entered into by and between Amarillo Biosciences, Inc., a Texas corporation (“Employer”) and Gary Coy (“Employee”). ABI and its controlled subsidiaries shall be hereinafter collectively referred to as “ABI Companies”. Employer hereby employs Employee, and Employee accepts employment, on the following terms and conditions.

ARTICLE I
TERM OF EMPLOYMENT

1.01. By this Contract, Employer employs Employee, and Employee accepts employment with Employer starting April 15, 2006, and with such ABI Companies as Employer shall designate, until this Contract shall have been terminated by either party by the serving of three months’ advance, written notice of such termination upon the other party.

ARTICLE II
COMPENSATION

2.01. As compensation for all services rendered under this Contract, Employee shall be paid by Employer a salary of TEN THOUSAND FOUR HUNDRED SIXTEEN AND 66/100 DOLLARS ($10,416.66) per month, payable at least monthly during the term of this Contract. The amount paid is to be prorated for any partial employment period. Furthermore, Employee recognizes that Employer may experience periodic cash shortages, and in such event, Employee will accept payment in Employer’s voting common stock, which stock shall be registered by Employer on Form S-8, or other suitable registration statement.

ARTICLE III
DUTIES OF EMPLOYEE

3.01. Employee is employed as Chief Financial Officer of Employer, and shall work in Travis County, Texas. Employee shall perform the duties of Chief Financial Office, as such duties may be further set fourth in the Bylaws of Employer, or by resolution of the Board of Directors of Employer. Employee shall devote his entire productive time, ability, attention and energies to the business of Employer during the term of this Contract, and during such time, Employee shall not directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether or not for compensation, without the prior consent of the Board of Directors of Employer, except for Ontra Inc. which may retain Dr. Coy to complete his obligations, not to exceed 10 hours per month.


 
 
 

ARTICLE IV
EMPLOYEE’S OBLIGATIONS AS TO INSURANCE

4.01. Employee agrees to submit to physical examination as may be required for the obtaining by Employer of insurance on Employee’s life, and agrees to consent to the issuance of a policy or policies of insurance on his life, such policies to be owned by Employer, and naming Employer as beneficiary. Upon termination of Employee’s employment for any reason, and if requested by Employee, Employer shall assign any such policy to Employee, so that Employee shall have the option of keeping the policy in force at Employee’s expense. The forgoing notwithstanding, Employer shall be entitled to retain the accumulated cash value of any such policy.

ARTICLE V
EMPLOYEE BENEFITS

5.01. If Employer provides hospital, surgical, medical, dental, group life insurance, or other fringe benefits to its employees, or any of them, at any time during the term of this Contract, Employee shall be entitled to participate in such benefits, on terms and conditions at least as favorable as those accorded to other employees of Employer, subject to insurability. At the present time, it is Employer’s intention that at the commencement date of this Contract, the healthcare plan available to Employees will be a health savings account, funded by Employees with pre-tax dollars from payroll withholding. Employee shall be entitled to vacation time as if the employee had been employed since March of 2003, but with no vacation time carried forward from periods prior to April 1, 2006.

ARTICLE VI
REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE

6.01. Employee is authorized to incur reasonable business expenses for promoting the business of Employer, including expenditures for entertainment and travel. Employer will reimburse Employee for all such expenses upon Employee’s presentation of written expense vouchers, itemizing such expenditures.

ARTICLE VII
PROPERTY RIGHTS OF PARTIES

7.01. Employee has had access to and become familiar with, and during the term of continued employment, will continue to have access to and become familiar with, various trade secrets, consisting of formulas, devices, secret inventions, processes, compilations of information, records, and specifications owned by ABI Companies and regularly used in the operation of ABI Companies. Employee shall not disclose any such trade secrets directly or indirectly nor use them in any way either during the term of this Contract or at any time thereafter except as required in the course of his employment. All files, records, documents, drawings, specifications, equipment and similar items relation to the business of ABI Companies, whether or not prepared by Employee, shall

 
 
 

remain the exclusive property of ABI Companies and shall not be removed from the premises of Employer under any circumstances, except in pursuit of the trade and business of ABI Companies

7.02. On the termination of employment or whenever requested by Employer, Employee shall immediately deliver to Employer all property in Employee’s possession or under Employee’s control belonging to ABI Companies, including but not limited to all accounting records, computer terminals and tapes, disks, or other data storage mechanisms, accounting machines, and all office furniture and fixtures, supplies and other personal property in the possession or under the control of Employee, in good condition, ordinary wear and tear excepted, and including without limitation all correspondence files, research date, and patent information or data, of every sort.

7.03. Employee does not claim any rights or interests in and to trade secrets, formulas, devices, inventions, processes, patents, applications, continuations, copyrights, trademarks, compilations of information, records, specifications, rights, interests and date of any other sort, affecting or pertaining directly or indirectly to the business of ABI Companies as now conducted, or to the patents, trade secrets, and other rights now owned by ABI Companies

7.04. Employee agrees that he will promptly and fully inform and disclose to Employer all inventions, designs, improvements and discoveries that Employee may have during the term of this Contract that pertain or relate to the business of ABI Companies or to any experimental work carried on by ABI Companies, whether conceived by Employee alone or with others and whether or not conceived during regular working hours. All such inventions, designs, improvements and discoveries shall be the exclusive property of Employer. Employee shall assist ABI Companies in obtaining patents on all such inventions, designs, improvements and discoveries deemed patentable by ABI Companies, and shall execute all documents and do all things necessary to obtain such patents for Employer or ABI Companies

7.05. It is contemplated that Employee in the course of his employment will be engaged in work involving various patents and secret processed owned by ABI Companies. All experiments, developments, formulas, patterns, devices, secret inventions and compilations of information, records and specifications regarding such matter are trade secrets, which Employee shall not disclose directly or indirectly to anyone other than ABI Companies or their agents, or use in any way either during the term of this Contract or at any time after the termination of this Contract, except as required in the course and scope of his employment.

7.06. During the term of this Contract, Employee shall not directly or indirectly either as an employee, employer, consultant, agent, principal, partner, stock holder, corporate office, director, or in any other individual or representative capacity engage or participate in any business that is in competition in any manner whatsoever with the business of ABI Companies; provided, however, that Employee may without restriction invest in professionally managed mutual funds and Employee may purchase, own and

 
 
 

sell stock or other securities, as long as Employee is not directly or indirectly through one or more intermediaries in control of or controlled by or under common control with any such company. Furthermore, upon the termination of this Contract, Employee expressly agrees not to engage or participate directly or indirectly in any business that is in competition with the business of ABI Companies, for a period of three (3) years; and further provided, that no business will be considered to be in competition with ABI Companies unless its business relates to the manufacture, sale, testing or development of products containing alpha interferon. Employer and Employee recognize and agree that ABI Companies may obtain or develop additional technologies from time to time, and if that is the case, Employer may expand the terms of this non-competition provision by giving written notice to Employee of the additional technologies that are to be protected.

7.07. In the event of a breach of Employee of any provisions of this Article VII, the parties hereto agree that Employer, in addition to any other remedies to which Employer may be entitled at law, shall be entitled to the remedy of specific performance, it being understood and agreed by the parties hereto that damages may be difficult to ascertain, and that an award of damages would in all probability not sufficiently compensate Employer for any breach of Employee of such provisions. ABI Companies are intended third-party beneficiaries of the provisions of this Article VII.

ARTICLE VIII
STOCK OPTION

8.01. Employer hereby grants to Employee non-transferable stock options to purchase 400,000 shares of Employer’s voting common stock, subject to the terms and conditions hereinafter set forth in this Article VIII. Where required by applicable laws or regulation, or by administrative necessity, the Board of Directors of Employer may prescribe additional terms and conditions regarding the issuance and administration of the stock option, as long as such additional terms and conditions do not conflict with the terms and conditions hereinafter set forth.

8.02. The options granted pursuant to Section 8.01 above, shall be exercisable as follows:

 
a. 
as to 100,000 shares, between April 1, 2007 and March 31, 2012, inclusive;

 
b. 
as to 100,000 shares, between April 1, 2008 and March 31, 2013, inclusive; and

c. 
as to 100,000 shares, between April 1, 2009 and March 31, 2014, inclusive; and

d. 
as to 100,000 shares, between April 1, 2010 and March 31, 2015, inclusive.

 
 
 



The exercise price for all options shall be $ 0.75 per share.

The foregoing notwithstanding, no options which are not already theretofore exercisable shall become exercisable at any time after the termination of Employee’s full time active employment with Employer, nor at any time after Employee receives notice of a pending or completed Change of Control as defined in Section 8.03, below.

8.03. In the event of death or complete disability of Employee, or a voluntary termination of employment (which shall include the resignation of Employee, or the giving of a notice of termination of this Contract, or a successor or amended employment contract, by Employee pursuant to Section 1.01, above),or notice of a pending or completed Change of Control as hereinafter defined, Employee (or if applicable, Employee’s estate or personal representative) shall have a period of sixty (60) days within which to exercise any matured (exercisable) options which have not theretofore been exercised; and after the expiration of said sixty (60) day period, such options shall expire and be of no further force or effect.

For purposes of this Agreement, “Change in Control” shall mean when any entity, person or group other than Employer or a Subsidiary of Employer or Hayashibara Biochemical Laboratories, Inc. or an affiliate thereof acquires shares of Employer in a transaction or series of transactions that result in such entity, person or group directly or indirectly owning beneficially fifty-one percent (51%) or more of Employer’s outstanding shares of voting common stock.

8.04. Stock for Stock Exercise. Where Employee so elects by written notification to Employer prior to or simultaneously with the exercise of one or more options, the exercise may be accomplished on a “stock for stock” basis as follows: in lieu of payment to Employer of the cash exercise price with respect to the options exercised, there shall be calculated the number of shares that could be purchased for the cash exercise price; and that number of shares shall be deducted from the shares issuable to Employee, with respect to that option exercise. 

8.05. The stock options herein granted are not qualified or incentive stock options within the meaning of the Internal Revenue Code of 1986, or successor provisions. Employer has provided no tax advice to Employee with respect to the taxation of the grant and/or exercise of such options, and/or the disposition of the underlying shares, and Employee has been advised to consult with his own tax advisor regarding such matters. Furthermore, the underlying shares will not be registered with the SEC, and will therefore be “Restricted Securities” within the meaning of Rule 144, promulgated under the Securities Act of 1933. Employer cannot insure that its securities will continue to qualify for sale or resale under Rule 144, and in the event Rule 144 should at some time, be no longer available with regard to such sales, Employee might find it difficult or impossible to sell the option shares.


 
 
 

ARTICLE IX
ENTIRETY OF AGREEMENT; AMENDMENTS; SURVIVAL

9.01. This Contract supersedes all other agreements, either oral or in writing, between the parties to this Contract with respect to the employment of Employee by Employer. This Contract contains the entire understanding of the parties and all of the covenants and agreements between the parties with respect to such employment.

9.02. This Contract may be amended only by an instrument signed in writing by both parties; and provided further, that no amendment may be executed on behalf of Employer, except pursuant to a resolution of the Board of Director of Employer.

9.03. The following provisions shall survive the expiration of this Agreement: ARTICLES VII, VIII, and IX.

IN WITNESS WHEREOF, this Contract is executed by the undersigned as of this 13th day of March, 2006.


EMPLOYEE:
  
EMPLOYER:
     
/s/ Gary Coy
  
/s/ Joseph M. Cummins
Gary Coy
  
Joseph M. Cummins

 
 
 

EMPLOYMENT CONTRACT
AMENDMENT SEPTEMBER 10, 2007


ARTICLE II
COMPENSATION

2.01. As compensation for all services rendered under this Contract, Employee shall be paid by Employer a salary of ONE HUNDRED TWENTY FIVE THOUSAND DOLLARS ($125,000.00) per year, payable at least monthly during the term of this Contract. The amount paid is to be prorated for any partial employment period. Furthermore, Employee recognizes that Employer may experience periodic cash shortages, and in such event, Employee will accept partial (no more than 50%) payment in Employer’s voting common stock, which stock shall be registered by Employer on Form S-8, or other suitable registration statement.

ARTICLE VIII
STOCK OPTION


The foregoing notwithstanding, no options which are not already theretofore exercisable shall become exercisable at any time after the termination of Employee’s full time active employment with Employer, nor at any time after Employee receives notice of a pending or completed Change of Control as defined in Section 8.03, below.

 EX-10.50 6 exhibit10-50123106.htm EXHIBIT 10.50 123106 Exhibit 10.50 123106
Exhibit 10.50
EMLOYMENT CONTRACT

This Employment Contract (“Contract”) is entered into by and between Amarillo Biosciences, Inc., a Texas corporation (“Employer”) and Joseph M. Cummins (“Employee”). ABI and its controlled subsidiaries shall be hereinafter collectively referred to as “ABI Companies”. Employer hereby employs Employee, and Employee accepts employment, on the following terms and conditions.

ARTICLE I
TERM OF EMPLOYMENT

1.01. By this Contract, Employer employs Employee, and Employee accepts employment with Employer starting September 10, 2006, and with such ABI Companies as Employer shall designate, until this Contract shall have been terminated by either party by the serving of three months’ advance, written notice of such termination upon the other party.

ARTICLE II
COMPENSATION

2.01. As compensation for all services rendered under this Contract, Employee shall be paid by Employer a salary of ONE HUNDRED SEVENTY FIVE THOUSAND DOLLARS ($175,000.00) per YEAR, payable at least monthly during the term of this Contract. The amount paid is to be prorated for any partial employment period. Furthermore, Employee recognizes that Employer may experience periodic cash shortages, and in such event, Employee will accept partial (no more than 50%) payment in Employer’s voting common stock, which stock shall be registered by Employer on Form S-8, or other suitable registration statement.

ARTICLE III
DUTIES OF EMPLOYEE

3.01. Employee is employed as President, Chief Executive Officer and Chairman of the Board of Directors of Employer, and shall work at the corporate offices in Amarillo, Texas. Employee shall perform the duties of as President, Chief Executive Officer and Chairman of the Board of Directors, as such duties may be further set fourth in the Bylaws of Employer, or by resolution of the Board of Directors of Employer. Employee shall devote his entire productive time, ability, attention and energies to the business of Employer during the term of this Contract, and during such time, Employee shall not directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether or not for compensation, without the prior consent of the Board of Directors of Employer.

 
 
 


ARTICLE IV
EMPLOYEE’S OBLIGATIONS AS TO INSURANCE

4.01. Employee agrees to submit to physical examination as may be required for the obtaining by Employer of insurance on Employee’s life, and agrees to consent to the issuance of a policy or policies of insurance on his life, such policies to be owned by Employer, and naming Employer as beneficiary. Upon termination of Employee’s employment for any reason, and if requested by Employee, Employer shall assign any such policy to Employee, so that Employee shall have the option of keeping the policy in force at Employee’s expense. The forgoing notwithstanding, Employer shall be entitled to retain the accumulated cash value of any such policy.

ARTICLE V
EMPLOYEE BENEFITS

5.01. If Employer provides hospital, surgical, medical, dental, group life insurance, or other fringe benefits to its employees, or any of them, at any time during the term of this Contract, Employee shall be entitled to participate in such benefits, on terms and conditions at least as favorable as those accorded to other employees of Employer, subject to insurability.

ARTICLE VI
REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE

6.01. Employee is authorized to incur reasonable business expenses for promoting the business of Employer, including expenditures for entertainment and travel. Employer will reimburse Employee for all such expenses upon Employee’s presentation of written expense vouchers, itemizing such expenditures.

ARTICLE VII
PROPERTY RIGHTS OF PARTIES

7.01. Employee has had access to and become familiar with, and during the term of continued employment, will continue to have access to and become familiar with, various trade secrets, consisting of formulas, devices, secret inventions, processes, compilations of information, records, and specifications owned by ABI Companies and regularly used in the operation of ABI Companies. Employee shall not disclose any such trade secrets directly or indirectly nor use them in any way either during the term of this Contract or at any time thereafter except as required in the course of his employment. All files, records, documents, drawings, specifications, equipment and similar items relation to the business of ABI Companies, whether or not prepared by Employee, shall remain the exclusive property of ABI Companies and shall not be removed from the premises of Employer under any circumstances, except in pursuit of the trade and business of ABI Companies.

 
 
 


7.02. On the termination of employment or whenever requested by Employer, Employee shall immediately deliver to Employer all property in Employee’s possession or under Employee’s control belonging to ABI Companies, including but not limited to all accounting records, computer terminals and tapes, disks, or other data storage mechanisms, accounting machines, and all office furniture and fixtures, supplies and other personal property in the possession or under the control of Employee, in good condition, ordinary wear and tear excepted, and including without limitation all correspondence files, research date, and patent information or data, of every sort.

7.03.  With the exception of inventor royalties currently owned by Employee, arising out of his previous employment by the University of Illinois and Texas A&M University, and relating to certain royalty payments receiv-able by Employee with respect to certain licenses heretofore granted by said Universities, Employee hereby promises and agrees to convey and assign to Employer any and all other rights or interests he may now have in and to trade secrets, formulas, devices, inventions, processes, patents, applica-tions, continuations, copyrights, trademarks, compilations of information, records, specifications, rights, interests and data of every other sort, affecting or pertaining directly or indirectly to the business of ABI Companies as now conducted, or to the patents, trade secrets, and other rights not owned by ABI Companies. In further clarification of the preceding sentence, it is not Employee's intention to retain individual-ly any such rights or interests, other than those heretofore specifically excepted. Except for the rights heretofore excepted, Employee does not claim any rights or interests in and to trade secrets, formulas, devices, inventions, processes, patents, applications, continuations, copyrights, trade-marks, compilations of information, records, specifications, rights, interests and data of any other sort, affecting or pertaining directly or indirectly to the business of ABI Companies as now conducted, or to the patents, trade secrets, and other rights now owned by ABI Companies.

7.04. Employee agrees that he will promptly and fully inform and disclose to Employer all inventions, designs, improvements and discoveries that Employee may have during the term of this Contract that pertain or relate to the business of ABI Companies or to any experimental work carried on by ABI Companies, whether conceived by Employee alone or with others and whether or not conceived during regular working hours. All such inventions, designs, improvements and discoveries shall be the exclusive property of Employer. Employee shall assist ABI Companies in obtaining patents on all such inven-tions, designs, improvements and discoveries deemed patentable by ABI Companies, and shall execute all documents and do all things necessary to obtain such patents for Employer or ABI Companies.

7.05. It is contemplated that Employee in the course of his employment will be engaged in work involving various patents and secret processed owned by ABI Companies. All experiments, developments, formulas, patterns, devices, secret inventions and compilations of information, records and specifications regarding such matter are trade secrets, which Employee shall not disclose directly or indirectly to anyone other than ABI Companies or their agents, or use in any way either during the

 
 
 

term of this Contract or at any time after the termination of this Contract, except as required in the course and scope of his employment.

7.06. During the term of this Contract, Employee shall not directly or indirectly either as an employee, employer, consultant, agent, principal, partner, stock holder, corporate office, director, or in any other individual or representative capacity engage or participate in any business that is in competition in any manner whatsoever with the business of ABI Companies, excluding any cattle derived dietary supplements; provided, however, that Employee may without restriction invest in professionally managed mutual funds and Employee may purchase, own and sell stock or other securities, as long as Employee is not directly or indirectly through one or more intermediaries in control of or controlled by or under common control with any such company. Furthermore, upon the termination of this Contract, Employee expressly agrees not to engage or participate directly or indirectly in any business that is in competition with the business of ABI Companies, for a period of three (3) years; and further provided, that no business will be considered to be in competition with ABI Companies unless its business relates to the manufacture, sale, testing or development of products containing alpha interferon. Employer and Employee recognize and agree that ABI Companies may obtain or develop additional technologies from time to time, and if that is the case, Employer may expand the terms of this non-competition provision by giving written notice to Employee of the additional technologies that are to be protected.

7.07. In the event of a breach of Employee of any provisions of this Article VII, the parties hereto agree that Employer, in addition to any other remedies to which Employer may be entitled at law, shall be entitled to the remedy of specific performance, it being understood and agreed by the parties hereto that damages may be difficult to ascertain, and that an award of damages would in all probability not sufficiently compensate Employer for any breach of Employee of such provisions. ABI Companies are intended third-party beneficiaries of the provisions of this Article VII.

ARTICLE VIII
STOCK OPTION

8.01. Employer hereby grants to Employee non-transferable stock options to purchase 400,000 shares of Employer’s voting common stock, subject to the terms and conditions hereinafter set forth in this Article VIII. Where required by applicable laws or regulation, or by administrative necessity, the Board of Directors of Employer may prescribe additional terms and conditions regarding the issuance and administration of the stock option, as long as such additional terms and conditions do not conflict with the terms and conditions hereinafter set forth.

8.02. The options granted pursuant to Section 8.01 above, shall be exercisable as follows:

 
 
 


 
a. 
as to 100,000 shares, between September 10, 2007 and September 9, 2012, inclusive;

 
b. 
as to 100,000 shares, between September 10, 2008 and September 9, 2013, inclusive; and

c. 
as to 100,000 shares, between September 10, 2009 and September 9, 2014, inclusive; and

d. 
as to 100,000 shares, between September 10, 2010 and September 9, 2015, inclusive.

The exercise price for all options shall be the closing price of ABI stock on September 8, 2006.

The foregoing notwithstanding, no options which are not already theretofore exercisable shall become exercisable at any time after the termination of Employee’s full time active employment with Employer.

8.03. In the event of death or complete disability of Employee, or a voluntary termination of employment (which shall include the resignation of Employee, or the giving of a notice of termination of this Contract, or a successor or amended employment contract, by Employee pursuant to Section 1.01, above), Employee (or if applicable, Employee’s estate or personal representative) shall have a period of sixty (60) days within which to exercise any matured (exercisable) options which have not theretofore been exercised; and after the expiration of said sixty (60) day period, such options shall expire and be of no further force or effect. In the event of notice of a pending or completed Change in Control, as hereinafter defined, all options held by Employee under this Employment Contract shall be immediately exercisable, and Employee shall thereupon have a period of sixty (60) days within which to exercise any or all of such options; and after the expiration of said sixty (60) day period, such options shall expire and be of no further force or effect.

For purposes of this Agreement, “Change in Control” shall mean when any entity, person or group other than Employer or a Subsidiary of Employer or Hayashibara Biochemical Laboratories, Inc. or an affiliate thereof acquires shares of Employer in a transaction or series of transactions that result in such entity, person or group directly or indirectly owning beneficially fifty-one percent (51%) or more of Employer’s outstanding shares of voting common stock.

8.04. Stock for Stock Exercise. Where Employee so elects by written notification to Employer prior to or simultaneously with the exercise of one or more options, the exercise may be accomplished on a “stock for stock” basis as follows: in lieu of payment to Employer of the cash exercise price with respect to the options exercised, there shall be calculated the number of shares that could be purchased for

 
 
 

the cash exercise price; and that number of shares shall be deducted from the shares issuable to Employee, with respect to that option exercise. 

8.05. The stock options herein granted are not qualified or incentive stock options within the meaning of the Internal Revenue Code of 1986, or successor provisions. Employer has provided no tax advice to Employee with respect to the taxation of the grant and/or exercise of such options, and/or the disposition of the underlying shares, and Employee has been advised to consult with his own tax advisor regarding such matters. Furthermore, the underlying shares will not be registered with the SEC, and will therefore be “Restricted Securities” within the meaning of Rule 144, promulgated under the Securities Act of 1933. Employer cannot insure that its securities will continue to qualify for sale or resale under Rule 144, and in the event Rule 144 should at some time be no longer available with regard to such sales, Employee might find it difficult or impossible to sell the option shares.

ARTICLE IX
ENTIRETY OF AGREEMENT; AMENDMENTS; SURVIVAL

9.01. This Contract supersedes all other agreements, either oral or in writing, between the parties to this Contract with respect to the employment of Employee by Employer. This Contract contains the entire understanding of the parties and all of the covenants and agreements between the parties with respect to such employment.

9.02. This Contract may be amended only by an instrument signed in writing by both parties; and provided further, that no amendment may be executed on behalf of Employer, except pursuant to a resolution of the Board of Director of Employer.

9.03. The following provisions shall survive the expiration of this Agreement: ARTICLES VII, VIII, and IX.

IN WITNESS WHEREOF, this Contract is executed by the undersigned as of this 10th day of September, 2006.

EMPLOYEE:
  
EMPLOYER:
   
AMARILLO BIOSCIENCES, INC.
     
/s/ Joseph M. Cummins
  
/s/ Gary W. Coy
Joseph M. Cummins
  
Gary W. Coy, VP, CFO

EX-10.51 7 exhibit10-51123106.htm EXHIBIT 10.51 123106 Exhibit 10.51 123106
Exhibit 10.51
EMLOYMENT CONTRACT

This Employment Contract (“Contract”) is entered into by and between Amarillo Biosciences, Inc., a Texas corporation (“Employer”) and Martin J. Cummins (“Employee”). ABI and its controlled subsidiaries shall be hereinafter collectively referred to as “ABI Companies”. Employer hereby employs Employee, and Employee accepts employment, on the following terms and conditions.

ARTICLE I
TERM OF EMPLOYMENT

1.01. By this Contract, Employer employs Employee, and Employee accepts employment with Employer starting September 10, 2006, and with such ABI Companies as Employer shall designate, until this Contract shall have been terminated by either party by the serving of three months’ advance, written notice of such termination upon the other party.

ARTICLE II
COMPENSATION

2.01. As compensation for all services rendered under this Contract, Employee shall be paid by Employer a salary of ONE HUNDRED TWENTY FIVE THOUSAND DOLLARS ($125,000.00) per year, payable at least monthly during the term of this Contract. The amount paid is to be prorated for any partial employment period. Furthermore, Employee recognizes that Employer may experience periodic cash shortages, and in such event, Employee will accept partial (no more than 50%) payment in Employer’s voting common stock, which stock shall be registered by Employer on Form S-8, or other suitable registration statement.

ARTICLE III
DUTIES OF EMPLOYEE

3.01. Employee is employed as Director of Clinical and Regulatory Affairs of Employer, and shall work at the corporate offices in Amarillo, Texas. Employee shall perform the duties of as Director of Clinical and Regulatory Affairs, as such duties may be further set fourth in the Bylaws of Employer, or by resolution of the Board of Directors of Employer. Employee shall devote his entire productive time, ability, attention and energies to the business of Employer during the term of this Contract, and during such time, Employee shall not directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether or not for compensation, without the prior consent of the Board of Directors of Employer. Consent is hereby granted to Employee to continue an ongoing project called Orange County Lipworks, LLC with his brother Matthew.

 
 
 


ARTICLE IV
EMPLOYEE’S OBLIGATIONS AS TO INSURANCE

4.01. Employee agrees to submit to physical examination as may be required for the obtaining by Employer of insurance on Employee’s life, and agrees to consent to the issuance of a policy or policies of insurance on his life, such policies to be owned by Employer, and naming Employer as beneficiary. Upon termination of Employee’s employment for any reason, and if requested by Employee, Employer shall assign any such policy to Employee, so that Employee shall have the option of keeping the policy in force at Employee’s expense. The forgoing notwithstanding, Employer shall be entitled to retain the accumulated cash value of any such policy.

ARTICLE V
EMPLOYEE BENEFITS

5.01. If Employer provides hospital, surgical, medical, dental, group life insurance, or other fringe benefits to its employees, or any of them, at any time during the term of this Contract, Employee shall be entitled to participate in such benefits, on terms and conditions at least as favorable as those accorded to other employees of Employer, subject to insurability.

ARTICLE VI
REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE

6.01. Employee is authorized to incur reasonable business expenses for promoting the business of Employer, including expenditures for entertainment and travel. Employer will reimburse Employee for all such expenses upon Employee’s presentation of written expense vouchers, itemizing such expenditures.

ARTICLE VII
PROPERTY RIGHTS OF PARTIES

7.01. Employee has had access to and become familiar with, and during the term of continued employment, will continue to have access to and become familiar with, various trade secrets, consisting of formulas, devices, secret inventions, processes, compilations of information, records, and specifications owned by ABI Companies and regularly used in the operation of ABI Companies. Employee shall not disclose any such trade secrets directly or indirectly nor use them in any way either during the term of this Contract or at any time thereafter except as required in the course of his employment. All files, records, documents, drawings, specifications, equipment and similar items relation to the business of ABI Companies, whether or not prepared by Employee, shall remain the exclusive property of ABI Companies and shall not be removed from the premises of Employer under any circumstances, except in pursuit of the trade and business of ABI Companies.

 
 
 


7.02. On the termination of employment or whenever requested by Employer, Employee shall immediately deliver to Employer all property in Employee’s possession or under Employee’s control belonging to ABI Companies, including but not limited to all accounting records, computer terminals and tapes, disks, or other data storage mechanisms, accounting machines, and all office furniture and fixtures, supplies and other personal property in the possession or under the control of Employee, in good condition, ordinary wear and tear excepted, and including without limitation all correspondence files, research data, and patent information or data, of every sort.

7.03.  Employee hereby promises and agrees to convey and assign to Employer any and all other rights or interests he may now have in and to trade secrets, formulas, devices, inventions, processes, patents, applica-tions, continuations, copyrights, trademarks, compilations of information, records, specifications, rights, interests and data of every other sort, affecting or pertaining directly or indirectly to the business of ABI Companies as now conducted, or to the patents, trade secrets, and other rights not owned by ABI Companies. In further clarification of the preceding sentence, it is not Employee's intention to retain individual-ly any such rights or interests. Employee does not claim any rights or interests in and to trade secrets, formulas, devices, inventions, processes, patents, applications, continuations, copyrights, trade-marks, compilations of information, records, specifications, rights, interests and data of any other sort, affecting or pertaining directly or indirectly to the business of ABI Companies as now conducted, or to the patents, trade secrets, and other rights now owned by ABI Companies.

7.04. Employee agrees that he will promptly and fully inform and disclose to Employer all inventions, designs, improvements and discoveries that Employee may have during the term of this Contract that pertain or relate to the business of ABI Companies or to any experimental work carried on by ABI Companies, whether conceived by Employee alone or with others and whether or not conceived during regular working hours. All such inventions, designs, improvements and discoveries shall be the exclusive property of Employer. Employee shall assist ABI Companies in obtaining patents on all such inven-tions, designs, improvements and discoveries deemed patentable by ABI Companies, and shall execute all documents and do all things necessary to obtain such patents for Employer or ABI Companies.

7.05. It is contemplated that Employee in the course of his employment will be engaged in work involving various patents and secret processed owned by ABI Companies. All experiments, developments, formulas, patterns, devices, secret inventions and compilations of information, records and specifications regarding such matter are trade secrets, which Employee shall not disclose directly or indirectly to anyone other than ABI Companies or their agents, or use in any way either during the term of this Contract or at any time after the termination of this Contract, except as required in the course and scope of his employment.

7.06. During the term of this Contract, Employee shall not directly or indirectly either as an employee, employer, consultant, agent, principal, partner, stock holder,

 
 
 

corporate office, director, or in any other individual or representative capacity engage or participate in any business that is in competition in any manner whatsoever with the business of ABI Companies; provided, however, that Employee may without restriction invest in professionally managed mutual funds and Employee may purchase, own and sell stock or other securities, as long as Employee is not directly or indirectly through one or more intermediaries in control of or controlled by or under common control with any such company. Furthermore, upon the termination of this Contract, Employee expressly agrees not to engage or participate directly or indirectly in any business that is in competition with the business of ABI Companies, for a period of three (3) years; and further provided, that no business will be considered to be in competition with ABI Companies unless its business relates to the manufacture, sale, testing or development of products containing alpha interferon. Employer and Employee recognize and agree that ABI Companies may obtain or develop additional technologies from time to time, and if that is the case, Employer may expand the terms of this non-competition provision by giving written notice to Employee of the additional technologies that are to be protected.

7.07. In the event of a breach of Employee of any provisions of this Article VII, the parties hereto agree that Employer, in addition to any other remedies to which Employer may be entitled at law, shall be entitled to the remedy of specific performance, it being understood and agreed by the parties hereto that damages may be difficult to ascertain, and that an award of damages would in all probability not sufficiently compensate Employer for any breach of Employee of such provisions. ABI Companies are intended third-party beneficiaries of the provisions of this Article VII.

ARTICLE VIII
STOCK OPTION

8.01. Employer hereby grants to Employee non-transferable stock options to purchase 400,000 shares of Employer’s voting common stock, subject to the terms and conditions hereinafter set forth in this Article VIII. Where required by applicable laws or regulation, or by administrative necessity, the Board of Directors of Employer may prescribe additional terms and conditions regarding the issuance and administration of the stock option, as long as such additional terms and conditions do not conflict with the terms and conditions hereinafter set forth.

8.02. The options granted pursuant to Section 8.01 above, shall be exercisable as follows:

 
a. 
as to 100,000 shares, between September 10, 2007 and September 9, 2012, inclusive;

 
b. 
as to 100,000 shares, between September 10, 2008 and September 9, 2013, inclusive; and

 
 
 


c. 
as to 100,000 shares, between September 10, 2009 and September 9, 2014, inclusive; and

d. 
as to 100,000 shares, between September 10, 2010 and September 9, 2015, inclusive.

The exercise price for all options shall be the closing price of ABI stock on September 8, 2006.

The foregoing notwithstanding, no options which are not already theretofore exercisable shall become exercisable at any time after the termination of Employee’s full time active employment with Employer.

8.03. In the event of death or complete disability of Employee, or a voluntary termination of employment (which shall include the resignation of Employee, or the giving of a notice of termination of this Contract, or a successor or amended employment contract, by Employee pursuant to Section 1.01, above), Employee (or if applicable, Employee’s estate or personal representative) shall have a period of sixty (60) days within which to exercise any matured (exercisable) options which have not theretofore been exercised; and after the expiration of said sixty (60) day period, such options shall expire and be of no further force or effect. In the event of notice of a pending or completed Change in Control, as hereinafter defined, all options held by Employee under this Employment Contract shall be immediately exercisable, and Employee shall thereupon have a period of sixty (60) days within which to exercise any or all of such options; and after the expiration of said sixty (60) day period, such options shall expire and be of no further force or effect.

For purposes of this Agreement, “Change in Control” shall mean when any entity, person or group other than Employer or a Subsidiary of Employer or Hayashibara Biochemical Laboratories, Inc. or an affiliate thereof acquires shares of Employer in a transaction or series of transactions that result in such entity, person or group directly or indirectly owning beneficially fifty-one percent (51%) or more of Employer’s outstanding shares of voting common stock.

8.04. Stock for Stock Exercise. Where Employee so elects by written notification to Employer prior to or simultaneously with the exercise of one or more options, the exercise may be accomplished on a “stock for stock” basis as follows: in lieu of payment to Employer of the cash exercise price with respect to the options exercised, there shall be calculated the number of shares that could be purchased for the cash exercise price; and that number of shares shall be deducted from the shares issuable to Employee, with respect to that option exercise. 

8.05. The stock options herein granted are not qualified or incentive stock options within the meaning of the Internal Revenue Code of 1986, or successor provisions. Employer has provided no tax advice to Employee with respect to the taxation of the

 
 
 

grant and/or exercise of such options, and/or the disposition of the underlying shares, and Employee has been advised to consult with his own tax advisor regarding such matters. Furthermore, the underlying shares will not be registered with the SEC, and will therefore be “Restricted Securities” within the meaning of Rule 144, promulgated under the Securities Act of 1933. Employer cannot insure that its securities will continue to qualify for sale or resale under Rule 144, and in the event Rule 144 should at some time be no longer available with regard to such sales, Employee might find it difficult or impossible to sell the option shares.

ARTICLE IX
ENTIRETY OF AGREEMENT; AMENDMENTS; SURVIVAL

9.01. This Contract supersedes all other agreements, either oral or in writing, between the parties to this Contract with respect to the employment of Employee by Employer. This Contract contains the entire understanding of the parties and all of the covenants and agreements between the parties with respect to such employment.

9.02. This Contract may be amended only by an instrument signed in writing by both parties; and provided further, that no amendment may be executed on behalf of Employer, except pursuant to a resolution of the Board of Director of Employer.

9.03. The following provisions shall survive the expiration of this Agreement: ARTICLES VII, VIII, and IX.

IN WITNESS WHEREOF, this Contract is executed by the undersigned as of this 10th day of October, 2006.

EMPLOYEE:
  
EMPLOYER:
   
AMARILLO BIOSCIENCES, INC.
     
/s/ Martin J. Cummins
  
/s/ Joseph M. Cummins
Martin J. Cummins
  
Joseph M. Cummins

EX-10.52 8 exhibit10-52123106.htm EXHIBIT 10.52 123106 Exhibit 10.52 123106
Exhibit 10.52
SUPPLY AGREEMENT
ANHYDROUS CRYSTALLINE MALTOSE

THIS AGREEMENT is made and effective this 26th day of October, 2006, by and between AMARILLO BIOSCIENCES, INC., a Texas corporation with its principal place of business at 4134 Business Park Drive, Amarillo, Texas 79110 (hereinafter “ABI”) and HAYASHIBARA BIOCHEMICAL LABORATORIES, INC. and HAYASHIBARA SHOJI, INC., each of them with its principal place of business at 2-3, Shimoishii 1-chome, Okayama 700-0907, Japan (hereinafter collectively “Hayashibara”). ABI and Hayashibara collectively referred to hereinafter as the “Parties”.
 
WHEREAS, Hayashibara desires to grant to ABI, and ABI desires to have, the exclusive right to purchase and distribute Hayashibara’s pharmaceutical grade anhydrous crystalline maltose, subject to the specifications as attached herewith (hereinafter “ACM”), for sale as an active ingredient in a nutraceutical product to treat dry mouth, which are developed, produced and commercialized by ABI's proprietary technology worldwide, except Japan.
 
NOW, THEREFORE, for and in consideration of the mutual covenants contained herein, Hayashibara and ABI agree as follows:
 
Section 1. Right to Purchase and Distribute Exclusively for Dry Mouth.
 
Hayashibara hereby grants to ABI the exclusive right to purchase, distribute and sell, worldwide, except Japan, a nutraceutical product for human consumption containing ACM as an active ingredient to relieve dry mouth (hereinafter the “Products”).
 
Section 2. Consideration.
 
Hayashibara shall receive a transfer fee from ABI in the amount of **** per kilogram. f.o.b. Kobe, Japan. At any time after the second contract year, either Party may notify the other that it desires to renegotiate the transfer fee. In such case, the parties shall attempt, in good faith, to agree to a mutually acceptable transfer fee. In the event the Parties agree to a modified transfer fee, said modified fee shall remain in force for a minimum of Two (2) years, and if the term of this Agreement is then within Two (2) years of expiration, the term of this Agreement shall be extended so that this Agreement shall terminate Two (2) years from the date the modified transfer fee became effective. In the event the Parties fail to agree to a modified transfer fee, either Party may terminate this Agreement by giving Six (6) months advanced written notice to the other party.
 
Section 3. Term.
 
Unless sooner terminated as hereinafter provided, this Agreement shall remain in effect for a period of Five (5) years from the date of this Agreement. After that initial term, the Agreement shall be automatically renewed for successive One (1) year term unless one of the Parties gives written notice of termination or modification of this Agreement to the other
 

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CONFIDENTIAL
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within Thirty (30) days prior to commencement of the renewal term. Any termination pursuant to this paragraph shall not relieve Hayashibara of any obligation to fill purchase orders placed with Hayashibara prior to termination. Similarly, such termination shall not relieve ABI of any obligation to Hayashibara to pay for ACM delivered by Hayashibara and any payment due hereunder prior to tell termination.
 
If ABI shall at any time during the initial term or any subsequent renewal term of this Agreement default in any obligation hereunder or fail to pay any payment due, and such default shall not be cured within sixty (60) days after written notice from Hayashibara to ABI specifying the nature of the default, Hayashibara may terminate this Agreement, or may demand specific performance and remedies for violation of the terms of this Agreement under applicable law.
 
If ABI shall be involved in financial difficulties as evidenced (a) by its commencement of a voluntary bankruptcy under any applicable bankruptcy code or statute, or by its authorizing, by appropriate proceedings, the commencement of such a voluntary bankruptcy; or (b) by its failing to receive dismissal of any involuntary case under any applicable bankruptcy code or statute within Sixty (60) days after initiation of such action or petition; or (c) by its seeking relief as a debtor under any applicable law of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors, or by consenting to or acquiescing in such relief, or (d) by the entry of an order by a court of competent jurisdiction finding it to be bankrupt or insolvent, or ordering or approving its liquidation, reorganization or any modification or alteration of the rights of its creditors or assuming custody of, or appointing a receiver or other custodian for, all or a substantial part of its property or assets; or (e) by its making an assignment for the benefit of, or entering into a composition with, its creditors, or appointing or consenting to the appointment of a receiver or other custodian for all or a substantial part of its property, this Agreement shall be terminated immediately.
 
Section 4. Orders, Shipment and Payment.
 
Actual quantities and delivery dates relating to ACM shall be specified in purchase orders submitted by ABI to Hayashibara, which purchase orders shall constitute firm and legally binding orders. Unless otherwise agreed in writing, Hayashibara hereunder shall accept each "individual purchase order by notifying ABI in writing its acceptance of an order within Ten (10) business days of receipt of the purchase order. Hayashibara shall ship ACM as specified in such accepted purchase orders within Thirty (30) days after Hayashibara's acceptance of a purchase order from ABI. The shipment of ACM under this Agreement shall be made on f.o.b. Kobe, Japan, unless otherwise agreed in writing. For shipment of ACM Hayashibara may arrange for a vessel or vessel space in ABI's name at ABI's cost.
 
Section 5. Minimum Purchase.
 
For the second contract year (which shall be the Twelve (12) month period commencing after the expiration of One (1) year from the date of this Agreement), ABI guarantees that it will purchase at least **** of ACM, with such amount increasing to **** for the third contract year, **** for the fourth contract year, and **** for the fifth and subsequent contract years.
 

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ABI agrees that the complete performance of the above minimum purchase guarantee is of essence for assuring the maintenance and continuation of this Agreement as an exclusive Supply Agreement. In the event such minimum purchases are not effected, this Agreement shall become nonexclusive; provided, however, that if the Parties shall have renegotiated an increased transfer fee pursuant to Section 2, above, and this Agreement thereafter becomes non-exclusive, Hayashibara shall not sell ACM to another party at a price less than the latest renegotiated transfer fee pursuant to Section 2, above.
 
Section 6. Indemnification.
 
ABI shall indemnify, hold harmless and defend Hayashibara from all claims, demands, payments, suits, actions and judgments brought, recovered or executed against the Parties on account of death, injury or damage sustained by any party in connection with ABI's distribution, marketing or sales of the Products under this Agreement, to the extent that such claims are the result of actions or inactions by ABI or its affiliates acting hereunder pursuant to this Section.
 
Hayashibara shall indemnify, hold harmless and defend ABI from all claims, demands, payments, suits, actions and judgments brought, recovered or executed against the Parties on account of death, injury or damage sustained by any party in connection with Hayashibara's manufacture or shipment of ACM under this Agreement, to the extent that such claims are the result of actions or inactions by Hayashibara.
 
Section 7. Confidentiality.
 
Each of the Parties agrees to maintain confidential and secret all information which may be disclosed or provided to it by the other and that the Parties may together subsequently acquire in relation to the Products and which is designated in writing by clearly identifiable legend as being confidential or secret in character.
 
Each Party's obligation to the other (to maintain confidentiality) hereunder shall terminate with respect to any particular item and only said item of the disclosing Party's confidential information, when the recipient Party can demonstrate that such item of information:
 
(1) Is publicly known and available through some means other than by the recipient Party's act or omission; or
 
(2) Was in the recipient Party's possession prior to its disclosure by the other Party, provided that written evidence of such possession is established; or
 
(3) Has come into the recipient Party's possession through a third party free of any obligation of confidentiality to the disclosing Party, where said third party has acquired information lawfully and not under circumstances forbidding its disclosure.
 

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Neither Party will permit confidential or secret information nor any part thereof to be disclosed to third parties or to employees except on a “need-to-know” basis and each will maintain confidential or secret information and/or documents with the same precautions it uses to safeguard its own confidential or secret information.
 
Each Party will notify the other promptly if it has knowledge that a third party possesses confidential or secret information of the other Party related to the Products.
 
Section 8. Miscellaneous.
 
(1) Force Majeure.
 
The failure of Hayashibara, ABI, or any of their affiliates or sublicenses to take any act required by this Agreement if occasioned by an act of God or the public enemy, fire, explosion, perils of the sea, floods, drought, war, riot, sabotage, accident, embargo or any circumstances of like or different character beyond the reasonable control of the Party so failing or by the interruption or delay in transportation, inadequacy, or shortage or failure of the supply of materials and/or request of any governmental officer, department or agency and whether in any case such circumstance now exists or hereafter arises, shall not subject said Party to any liability to the other.
 
(2) Arbitration.
 
The Parties hereto desire to avoid and settle without litigation future disputes that may arise between them relative to this Agreement. Accordingly, the parties agree to engage in good faith negotiations to resolve any such dispute. In the event they are unable to resolve any such dispute by negotiation, such dispute shall be submitted to arbitration as follows: If arbitration is initiated by Hayashibara, it shall be held in the State of Texas, USA, in compliance with the Commercial Arbitration Rules of the American Arbitration Association. If arbitration is initiated by ABI, it shall be held in Tokyo, Japan in compliance with the Rules of the Japan Commercial Arbitration Association. The arbitration award shall be final and binding upon the parties hereto and may be filed with and enforced by any competent court having jurisdiction to enforce said award.
 
(3) Communication.
 
Any payment, notice or other communication required or permitted to be made or given to either Party hereto pursuant to this Agreement shall be sufficiently made or given on the date of sending if sent to such Party by certified or registered mail or by Federal Express or a similar overnight courier service, postage or delivery charge prepaid, by telex, or telephone facsimile addressed to it at its address set forth, or to such other address(es) as it may designate by written notice given to the other Party as follows:
 

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In case of HBL
 
Dr. Kunihiro Ohashi
Overseas Business Development
Hayashibara Company Ltd.
2-3 Shimoishii 1-chome
Okayama, Japan
 
In case of ABI
 
Dr. Joseph M. Cummins, President
Amarillo Biosciences, Inc.
4134 Business Park Drive
Amarillo, TX 79110 
 
(4) Assignment or Sublicense.
 
This Agreement shall not be assignable by ABI to any person or entity without prior written consent of HBL, which consent shall not be unreasonably withheld in any case involving or the sale or transfer of all or substantially all of the business or assets of ABI.
 
The foregoing restrictions on assignment notwithstanding, ABI may contract, license, or otherwise employ one or more distributors to assist it in the sale of the Products.
 
(5) Amendment.
 
This Agreement shall not be amended, in whole or in part, without the prior written consent of the Parties.
 
(6) Nature of Relationship.
 
Nothing herein shall be construed to place the Parties in a relationship of partners or joint ventures, nor does this Agreement make either Party the agent or legal representative of the other for any purposes whatsoever. The Parties further agree that no representation shall be made by either Party that would create an apparent agency, employment, partnership or joint venture. Neither Party shall have the power express or implied, to obligate the other in any manner whatsoever.
 

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IN WITNESS WHEREOF, the Parties hereunto have caused this Distribution Agreement to be executed in duplicate by their duly authorized representatives as of the date first above written.
 
ABI
 
  
On behalf of Hayashibara
 
AMARILLO BIOSCIENCES, INC.
 
  
HAYASHIBARA BIOCHEMICAL LABORATORIES, INC.
 
By: /s/ Joseph M. Cummins
 
  
By: /s/ Yasushi Hayashibara
 
Joseph M. Cummins, DVM, PhD
 
  
Mr. Yasushi Hayashibara
CEO

 
 EX-10.53 9 exhibit10-53123106.htm EXHIBIT 10.53 123106 Exhibit 10.53 123106
 
Exhibit 10.53
 
 

 
 
LICENSE AND SUPPLY AGREEMENT
 
 

 
 

 
 
Between
 
 

 
 

 
 
CYTOPHARM, INC.
 
 

 
 
&
 
 

 
 
AMARILLO BIOSCIENCES, INC.
 
 

 
 

 
 

 
 

 
 

 
 
November 16, 2006
 
 

 
 

 
 

 

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TABLE OF CONTENTS
ARTICLE I: DEFINITIONS
5
 
 
ARTICLE II:  RESEARCH AND DEVELOPMENT
12
            Section 2.01.  ABI Obligations
12
            Section 2.02.  CYTO Obligations
13
            Section 2.03.  Availability of Resources; Corporation
14
            Section 2.04.  Reporting Obligations of CYTO
14
 
 
ARTICLE III:  LICENSE
14
            Section 3.01.  License and Supply Grant
14
            Section 3.02.  Restrictions.
15
            Section 3.03.  Retained Rights
15
            Section 3.04.  First Right of Refusal
15
 
 
ARTICLE IV:  PAYMENTS AND ROYALTIES
15
            Section 4.01.  Initial Fee
15
            Section 4.02.  Royalty Payments
16
            Section 4.03.  Milestone Payments
16
            Section 4.04.  Minimum Royalty
16
            Section 4.05.  Reports
16
            Section 4.06.  Records and Audits
17
            Section 4.07.  Exchange Rate; Manner and Place of Payment
17
            Section 4.08.  Late Payments
18
            Section 4.09.  Taxes
18
 
 
ARTICLE V:  TERM AND TERMINATION
18
            Section 5.01.  Term
18
            Section 5.02.  Termination by CYTO
18
            Section 5.03.  Termination by ABI
18
            Section 5.04.  Termination Upon Certain Events
19
            Section 5.05.  Remedies
20
            Section 5.06.  Effect of Termination
20
            Section 5.07.  Bankruptcy
20
            Section 5.08.  Continuing Obligations
21
            Section 5.09.  Return of Confidential Information
21
 
 
ARTICLE VI:  SUPPLY, MANUFACTURE AND PURCHASE OF PRODUCT
21
            Section 6.01.  Supply of Product and Bulk Interferon
21
            Section 6.02.  Supply of Manufacturing Rights
21
            Section 6.03.  Quality Assurance
22
            Section 6.04.  ABI's Duties
22
            Section 6.05.  CYTO's Duties if Manufacturing
23
            Section 6.06.  Failure to Supply
23
 
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            Section 6.07.  Allocation
24
            Section 6.08.  Records and Audits
24
 
 
ARTICLE VII:  PURCHASE AND <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />SALE
24
            Section 7.01.  Purchase Price and Payment
24
            Section 7.02.  Labeling and Artwork
25
            Section 7.03.  Purchase Forms
25
            Section 7.04.  Confirmation
25
            Section 7.05.  Delivery
25
            Section 7.06.  Forecasts and Orders
26
 
 
ARTICLE VIII:  WARRANTY, REJECTION AND INSPECTIONS
27
            Section 8.01.  ABI Warranty
27
            Section 8.02.  Rejection of Product for Failure to Conform to Specifications
27
            Section 8.03.  CYTO Inspections
28
 
 
ARTICLE IX:  REGULATORY COMPLIANCE
28
            Section 9.01.  Maintenance of Marketing Authorizations
28
            Section 9.02.  Adverse Drug Event Reporting and Phase IV Surveillance
28
            Section 9.03.  Commercial Sale Testing and Reporting
29
            Section 9.04.  Assistance
29
            Section 9.05.  Compliance
30
 
 
ARTICLE X:  REPRESENTATIONS, WARRANTIES AND COVENANTS
30
            Section 10.01. Corporate Power
30
            Section 10.02. Due Authorization
30
            Section 10.03.  Binding Obligation
30
            Section 10.04. Ownership of ABI Rights
30
            Section 10.05. Material Agreements
31
            Section 10.06. Adverse Properties
31
            Section 10.07. Preservation of Name and Reputation
31
            Section 10.08. Debarment
31
            Section 10.09. Limitation on Warranties
32
            Section 10.10. Limitation of Liability
32
 
 
ARTICLE XI:  PATENTS AND TRADEMARK
32
            Section 11.01.  Filing, Maintenance and Protection of Patents
32
 
 
ARTICLE XII:  COVENANTS OF CYTO AND ABI
32
            Section 12.01. Access to Books and Records
32
            Section 12.02. Further Actions
32
            Section 12.03. Equitable Relief
33
 
 
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ARTICLE XIII INDEMNIFICATION
33
            Section 13.01. CYTO Indemnified by ABI
33
            Section 13.02. ABI Indemnified by CYTO
33
            Section 13.03. Prompt Notice Required
34
            Section 13.04. Indemnitor May Settle
34
 
 
ARTICLE XIV:  DISPUTE RESOLUTION
35
            Section 14.01.  Disputes
35
            Section 14.02. Trial Without Jury
35
            Section 14.03. Performance to Continue
35
            Section 14.04. Provisional Remedies
35
            Section 14.05. Determination of Patents and Other Intellectual Property.
35
 
 
ARTICLE XV:  CONFIDENTIALITY
36
            Section 15.01. Confidentiality
36
            Section 15.02. Publicity Review
36
 
 
ARTICLE XVI:  MISCELLANEOUS
37
            Section 16.01. Commercially Reasonable Efforts
37
            Section 16.02. Notices
37
            Section 16.03. Severability
37
            Section 16.04. Entire Agreement/Merger
38
            Section 16.05. Amendment
38
            Section 16.06. Counterparts
38
            Section 16.07. No Waiver of Rights
38
            Section 16.08. Force Majeure
39
            Section 16.09. Further Assurances
39
            Section 16.10. Assignment and Sublicense
39
            Section 16.11. Expenses
39
            Section 16.12. Binding Effect
39
            Section 16.13. Governing Law
40
            Section 16.14. Survival of Representations and Warranties
40
            Section 16.15. No Strict Construction
40
            Section 16.16. Independent Contractors.
40
 
Exhibit I - HBL License and Supply Agreement
 
Exhibit II - PPM License Agreement
 
Exhibit III - ISI License Agreement
 
Exhibit IV - TAMU License Agreement
 
Exhibit V - Specifications
 
Exhibit VI - Certificate of Compliance
 

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LICENSE AND SUPPLY AGREEMENT
 
 
This License and Supply Agreement (“Agreement”) is made as of November 16, 2006 (the “Effective Date”), by and between CytoPharm, Inc., (“CYTO”), a corporation, having a principal place of business at 6 F No. 6, Jungshing Road, Sec. 1, Wugu Shiang, Taipei County 248, Taiwan, and Amarillo Biosciences, Inc., a Texas corporation (“ABI”), with its principal place of business located at 4134 Business Park Drive, Amarillo, Texas 79110, USA. ABI and CYTO are sometimes referred to collectively herein as the “Parties” and individually as a “Party.”
 
 
WHEREAS, ABI has substantial expertise in the oral use of human interferon alpha (“IFN”) and have proprietary rights and Know-How in the field of formulation of oral IFN;
 
 
WHEREAS, ABI is willing to disclose to CYTO the ABI Know-How consisting of human clinical data and all other data, including but not limited to, safety, bioavailability, and clinical trial data necessary for CYTO to obtain regulatory approval for a product for the treatment of human diseases in the Territory; and
 
 
WHEREAS, ABI has an exclusive worldwide license (except Japan) to market and distribute the oral formulation of Hayashibara (known as “HBL”) IFN, and desires to provide HBL oral IFN to CYTO on the terms and conditions herein set forth, and CYTO desires to obtain the right to perform clinical trials on, distribute and market, HBL IFN on the terms and conditions herein set forth;
 
 
WHEREAS, ABI owns certain proprietary information, intellectual property, Patents and ABI Know-How, and other rights relating to the use of low dose oral IFN for the treatment or prevention of human diseases;
 
 
WHEREAS, subject to the terms of this Agreement, ABI desires to grant to CYTO, and CYTO wishes to obtain from ABI, an exclusive supply agreement and distribution license, subject to existing rights, to such Know-How and related intellectual property rights in the Territory in connection with the Product; and
 
 
WHEREAS, ABI is willing to grant such rights and licenses to CYTO under the terms and conditions hereinafter set forth.
 
 
NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements hereinafter set forth, the Parties mutually agree as follows:
 
 
ARTICLE I:
 
 
DEFINITIONS
 
 
(a)  The following terms as used in the Agreement shall, unless the context clearly indicates to the contrary, have the meaning set forth below:
 

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“ABI Know-How” means all Know-How under the Control of ABI as of the Effective Date and at any time during the TERM related to (but not claimed under) the ABI Patent Rights and which is necessary or useful to develop, Manufacture and/or commercialize the Product, including all information, reports, results, inventions, materials, and any other technical and scientific data, specifications and formulae directly related to the development, regulato-ry approval, Manufacture, testing, use, marketing and/or sale of Product, including non-patentable Improvements, and any nonpublic information relevant to the ABI Patent Rights, including preclinical and clinical data from ABI's past, current or future studies, relating to safety or bioavailability, or preclinical or clinical data relating to the use of HBL oral IFN and/or IFN for the treatment or prevention of human diseases.
 
 
“ABI Patent Rights” means all Patent Rights that are under the Control of ABI as of the Effective Date under US patent laws’ protection, and at any time during the TERM that are necessary or useful to the use, development, Manufacture, marketing, promotion, distribution, sale and/or commercialization of the Product for use in the treatment of the Licensed Indications, and Improvements thereto developed by or on behalf of ABI during the TERM.
 
 
“ABI Technology” means the ABI Patent Rights and the ABI Know-How.
 
 
“Affiliate” means any entity, which directly or indirectly controls, is controlled by or is under common control with either CYTO or ABI. The term “control” as used in the preceding sentence means the power to direct or control the affairs of such entity, and control shall be presumed where CYTO or ABI or their Affiliates (as the case may be) own fifty percent (50%) or more of the voting stock or other equity interests of such entity.
 
 
“Applicable Laws” means all applicable laws, rules, Regulations and guidelines within or without the Territory that may apply to the marketing or sale of the Product in the Territory or the performance of either Party's obligations under this Agreement including laws, Regulations and guidelines governing the marketing, distribution and sale of the Product in the Territory, to the extent applicable and relevant, and including all cGMP or current Good Clinical Practices standards or guidelines promulgated by the FDA or the Governmental Authorities and including trade association guidelines. The laws are also under the designated Territory.
 
 
“Bulk IFN” means concentrated powdered, frozen, lyophilized or liquid, HBL IFN, which can be used to Manufacture Product.
 
 
 
 
“CFR” means the United States Code of Federal Regulations.
 
 
  “DOH” means the Department of Health of Republic of China (Taiwan).
 
 
 

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(a)  is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party, generally known or available or accessible through public domains;
 
 
(b)  is known by the receiving Party at the time of receiving such information, as evidenced by its written records maintained in the ordinary course of business;
 
 
(c)  is hereafter furnished to the receiving Party by a Third Party, as a matter of right and without restriction on disclosure;
 
 
(d)  is independently developed by the receiving Party, as evidenced by its written records, without knowledge of, and without the aid, application or use of, the disclosing Party's Confidential Information; or
 
 
(e)  is the subject of a written permission to disclose provided by the disclosing Party.
 
 
Any Confidential Information will be marked as “Confidential & Proprietary Information” at the foot or head of every page throughout the documents.
 
 
“Control” means the possession of the ability to grant a license or sublicense as provided for herein without violating the terms of any agreement or other arrangement with any Third Party.
 
 
“Existing Licensees” means, as applicable, Pharma Pacific Management Pty, Ltd. (PPM), HBL and Interferon Sciences, Inc. (ISI), their successors, transferees and licensees.
 
 
“Existing Licenses” means, as applicable, the HBL Agreement, the PPM Agreement, the ISI Agreement and the TAMU License Agreement. These licenses will be attached into this document as Exhibit I, Exhibit II, Exhibit III and Exhibit IV, respectively.
 
 
“FDA” means the United States Food and Drug Administration.
 
 
“First Commercial Sale” means after obtaining the necessary Governmental Approval, the first sale for use, consumption or resale of a Product by CYTO, its Affiliates or its sublicensees in the Territory (excluding any transactions for clinical trials). A sale to an Affiliate shall not constitute a First Commercial Sale unless the Affiliate is the end user of the Product.
 

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“First Right of Refusal” means the right of CYTO to license another clinical indication under terms and conditions noticed in writing by ABI to CYTO. CYTO shall have thirty (30) days to accept such terms, and if it does not do so, ABI shall have the right to license such clinical indication in the Territory to an unrelated third-party under the same terms and conditions theretofore noticed to CYTO, at any time within six (6) months of the expiration of the aforesaid thirty (30) day acceptance period.
 
 
“GAAP” means United States generally accepted accounting principles, consistently applied in accordance with past practice.
 
 
“Good Clinical Practices” means good clinical practices as defined in 21 CFR § 50 et. seq. and § 312 et. seq.
 
 
“Governmental Approval” means all permits, licenses and authorizations, including Marketing Authorizations, required by any Governmental Authority in the Territory as a prerequisite to the Manufacturing, packaging, marketing and selling of the Product.
 
 
“Governmental Authority” means any federal, state, local or other government, administrative or regulatory agency, authority, body, commission, court, tribunal or similar entity, including other entities in each country in the Territory responsible for the regulation of medicinal products intended for human use.
 
 
“HBL” means Hayashibara Biochemical Laboratories, Inc. of Okayama, Japan.
 
 
“HBL Agreement” means the Joint Development and Manufacturing/Supply Agreement by and between HBL and ABI dated as of March 13, 1992 (Exhibit Ia), as amended by the First Amendment to Joint Development and Manufacturing/Supply Agreement dated as of January 17, 1996 (Exhibit Ib) and the Addendum to Manufacturing/Supply Agreements dated as of May 10, 1996 (Exhibit Ic) and September 7, 2001 (Exhibit Id).
 
 
“HBL IFN” means the cell culture derived human lymphoblastoid IFN produced by HBL.
 
 
“Improvements” means any and all developments, inventions or discoveries in the Licensed Indication relating to the ABI Patent Rights developed by ABI, or acquired by ABI at any time during the TERM and shall include developments intended to enhance the safety and/or efficacy of the Product.
 
 
“IFN” means human interferon alpha.
 
 
“ISI Agreement” means the License Agreement dated October 20, 1989 by and between Interferon Sciences, Inc. and ABI, as successor-in-interest to Amarillo Cell Culture Company, Incorporated (Exhibit III).
 
 
“Know-How” means all know-how, trade secrets, inventions, data, processes, techniques, procedures, compositions, devices, methods, formulas, protocols and information, whether or not patentable, which are not generally publicly known, including, without limitation, all chemical,
 

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biochemical, toxicological, and scientific research information, whether in written, graphic or video form or any other form or format, used to produce human interferon alpha and its oral formulation.
 
 
“Licensed Indications” means the human clinical indications of hepatitis B and influenza and one additional human clinical indication to be selected by CYTO within 180 days of the execution, treated or treatable by the oral administration of IFN. Failure to notify ABI in writing of their selection of an additional clinical indication within 180 days of execution shall limit CYTO to the clinical indications of hepatitis B and influenza.
 
 
“Manufacture” or “Manufacturing Process” means the storage, handling, production, processing and packaging of the Product, in accordance with this Agreement and Applicable Laws.
 
 
“Marketing Authorization” means all necessary and appropriate regulatory approvals, including Pricing and Reimbursement Approvals, where applicable, to put the Product on the market in the Territory.
 
 
“Material Agreements” means the Existing Licenses, and the TAMU License Agreement (Exhibit IV).
 
 
“NDA” means a new drug application, biological license application or establishment license application, as applicable, and all amendments and supplements thereto, filed or to be filed, with the FDA seeking authorization and approval to Manufacture, package, ship and sell the Product as more fully described in the Regulations.
 
 
“Net Sales” means the invoice amounts actually received for sales of the Product by CYTO, its Affiliates or sub-licensees in a bona fide arm's length transaction, less the following items, provided that they are bona fide transactions designed to optimize the sales of Product (a) cash discounts and trade allowances actually granted, (b) rebates and charge backs required by Applicable Laws or made pursuant to agreements with customers, (c) credits or allowances actually granted upon claims, damaged goods, outdated goods, rejections or returns of such Product, including recalls, (d) taxes, tariffs and similar obligations, duties or other governmental charges (other than income taxes and inventory taxes) levied on, absorbed or otherwise imposed on sales of such Product in the Territory and shown separately on the invoice, (e) shipping charges, ****.
 
 
Components of Net Sales shall be determined in the ordinary course of business in accordance with historical practice and using the accrual method of accounting in accordance with GAAP, or local common practice with certified CPA approval, but shall not include any sales of the Product for pre-clinical or clinical testing or for other than commercial purposes.
 
 
In the event CYTO transfers the Product to a Third Party in a bona fide arm's length transaction, for consideration, in whole or in part, other than cash or to a Third Party in other than a bona fide arm's length transaction, the Net Sales price for such Product shall be deemed to
 

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be the standard invoice price then being invoiced by CYTO in an arms length transaction with similar customers for similar amounts less the items set forth in (a) through (g) above.
 
 
“Patent Rights” means all rights related to human interferon alpha under patents and patent applications, and any and all patents issuing there from (including utility, model and design patents and certificates of invention), together with any and all substitutions, extensions (including supplemental protection certificates), registrations, confirmations, reissues, divisional, continuations, continuations-in-part, re-examinations, renewals and foreign counterparts of the foregoing and all Improvements, supplements, modifications or additions during the term.
 
 
“Phase IV” means, as applicable, a study or program designed to obtain additional safety or efficacy data, detect new uses for a drug, or to determine effectiveness for labeled indications under conditions of widespread usage, which is commenced after Government Approval of the Product in the applicable country in the Territory or any such study or program required by the FDA or other applicable Governmental Authority.
 
 
“PPM Agreement” means the PPM/ACC Sublicense Agreement dated April 27, 1995 by and between Pharma Pacific Management Pty, Ltd. and ABI (Exhibit II).
 
 
“Pricing and Reimbursement Approvals” means any pricing and reimbursement approval, by government agency in the Territory, that must be obtained before placing the Product on the market in the Territory in which such approval is required.
 
 
“Prime Rate of Interest” means the prime rate of interest published from time to time in The Wall Street Journal as the prime rate; provided, however that if The Wall Street Journal does not publish the prime rate of interest, then the term “Prime Rate of Interest” shall mean the rate of interest publicly announced by Bank of America, N.A., as its prime rate, base rate, reference rate or the equivalent of such rate, whether or not such bank makes loans to customers at, above, or below said rate.
 
 
“Product” means a formulation or composition containing HBL IFN and designated, detailed, or labeled for oral use in the treatment of the Licensed Indications.
 
 
 
 
“SFDA” means the State Food and Drug Administration of People’s Republic of China (or China).
 
 
“Shipment” or “Shipped” means each individual group of Product received by CYTO from ABI or its agent.
 
 
“Specifications” means the specifications for the Product. The initial Specifications are attached hereto as Exhibit V.
 

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“TAMU License Agreement” means the License Agreement between The Texas A&M University System and ABI dated March 22, 1988 (Exhibit IVa), as amended by Amendment No. 1 dated September 17, 1998 (Exhibit IVb).
 
 
“Territory” means both China and Taiwan.
 
 
“Third Party” means any entity other than ABI or CYTO or an Affiliate of ABI or CYTO.
 
 
“Transfer Fee” means purchase price billed to CYTO by ABI for Product and Bulk IFN.
 
 
“Unit” means a single finished dosage form of Product in the form designated by CYTO, which initially, for clinical supplies, shall consist of a 200 mg by weight, with 150 international units by activity, tablet or lozenge. Clinical testing may result in a change in the optimal dose and require a new definition of “Unit.”
 
 
(b)  Each of the following terms is defined in the Section or under the defined term set forth opposite such term below:
 
ABIPreamble
ADESection 9.02
AgreementPreamble
Clinical RecordsSection 2.02(c)
Disputed AmountSection 5.03(a)
DMFSection 2.02(b)
Effective DatePreamble
Force MajeureSection 16.08
CYTOPreamble
IndemniteeSection 13.03
IndemnitorSection 13.03
LossSection 13.01
PartiesPreamble
PartyPreamble
Purchase PriceSection 7.01
RepresentativesSection 15.01
Royalty Payment DateSection 4.02
MILESTONE PAYMENTSSection 4.03
SECSection 15.02
SOPSection 9.02
TERMSection 5.01
 
(c)  Interpretation. The section headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. Except where the context clearly requires to the contrary: (i) each reference in this Agreement to a designated “Section” or “Exhibit” is to the corresponding Section or Exhibit of or to this Agreement; (ii)
 

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instances of gender or entity-specific usage (e.g., “his” “her” “its” “person” or “individual”) shall not be interpreted to preclude the application of any provision of this Agreement to any individual or entity; (iii) the word “or” shall not be applied in its exclusive sense; (iv) “including” shall mean “including, without limitation”; (v) references to laws, Regulations and other governmental rules, as well as to contracts, agreements and other instruments, shall mean such rules and instruments as in effect at the time of determination (taking into account any amendments thereto effective at such time without regard to whether such amendments were enacted or adopted after the effective date of this Agreement) and shall include all successor rules and instruments thereto; (vi) references to “$” or “dollars” shall mean the lawful currency of the United States; (vii) references to “Federal” or “federal” shall be to laws, agencies or other attributes of the United States (and not to any State or locality thereof); (viii) the meaning of the terms “domestic” and “foreign” shall be determined by reference to the United States; (ix) references to “days” shall mean calendar days; (x) references to months or years shall be to the actual calendar months or years at issue (taking into account the actual number of days in any such month or year); (xi) days, business days and times of day shall be determined by reference to local time in Amarillo, Texas; and (xii) the English language version of this Agreement shall govern all questions of interpretation relating to this Agreement, notwithstanding that this Agreement may have been translated into, and executed in, other languages.
 
 
RESEARCH AND DEVELOPMENT
 
 
 
(a)  As soon as reasonably practicable after the Effective Date, ABI will make available all ABI Know-How to CYTO for CYTO's inspection and at CYTO's request will provide CYTO with a copy of all ABI Know-How in tangible form and a written summary of all ABI Know-How not in tangible form. In the event CYTO request that more the 1,000 pages be copied in connection with the foregoing, CYTO shall reimburse ABI for ABI’s actual out of pocket costs for making copies in excess of 1,000 pages, CYTO shall pay ABI such amounts within 30 days following CYTO’s receipt of an invoice therefor accompanied by documentation reasonably supporting such invoice.
 
 
(b)  ABI agrees to maintain, or ask HBL to maintain, the Drug Master File (“DMF”) for HBL IFN up-to-date at all times during the TERM. ABI shall cooperate fully with CYTO in order to obtain all the Marketing Authorizations, which now are or later become necessary to develop, Manufacture, use, market or sell any Product. Such cooperation shall include, but not be limited to, ABI providing CYTO with the ABI Know-How and ABI appearing at and participating in meetings with regulatory agencies at the reasonable request of CYTO to assist CYTO in obtaining such Marketing Authorizations as are now required, or may in the future be required to Manufacture, use, market or sell any Product. ABI shall execute, or ask third parties to execute, upon request by CYTO, any and all documents reasonably necessary to obtain such Marketing Authorizations. CYTO (with its written pre-approval) shall reimburse ABI for any reasonable out-of-pocket costs, including reasonable attorney's fees, employee salary and travel expenses incurred by ABI in connection with such cooperation. If CYTO will not approve the
 

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reimbursement, then ABI shall not be required to perform the task. ABI agrees to pay airfare only for one person for up to 3 trips to China and/or Taiwan to cooperate with CYTO during clinical trials and/or to participate in meetings with regulatory agencies.
 
 
(c)  ABI shall provide to CYTO or any sub-licensee of CYTO, at CYTO's request and, unless otherwise set forth in this Agreement, CYTO’s sole expense, with ABI Technology reasonably necessary to enable CYTO or such sub-licensee to exercise fully its rights and fulfill its obligations under this Agreement.
 
 
(d)  ABI and CYTO will review the Patent Rights related to CYTO’s activities in the Territory. Once the Parties agree to a strategy, CYTO will make its best efforts to maintain all necessary ABI Technology in the Territory (see Section 11.01). 
 
 
Section 2.02. CYTO Obligations.
 
(a)  CYTO will use commercially reasonable efforts (as defined in Section 16.01) to timely complete at the sole cost and expense of CYTO (i) clinical trials and development of Product for the treatment of the Licensed Indications, (ii) animal toxicology and other pre-clinical studies required for commercial launch of the Product, and (iii) other tasks supporting commercialization of the final formulation of the Product. 
 
 
(b)  CYTO shall use commercially reasonable efforts (as defined in Section 16.01) to timely secure any and all Governmental Approvals in the Territory and shall own and maintain all Governmental Approvals and related information as provided herein. The Parties agree and acknowledge that Governmental Approval for the Product will be sought in The Territory.
 
 
(c)  The foregoing notwithstanding, it shall be conclusively presumed that CYTO has not used “commercially reasonable efforts” as to a particular Licensed Indication, if (i) CYTO fails to enroll patients in human clinical trials in that Licensed Indication within two (2) years of the Effective Date; or (ii) CYTO fails to achieve commercial sales of a Licensed Indication within seven (7) years of the Effective Date.
 
 
(d)  CYTO shall maintain records in sufficient detail and in good scientific manner appropriate for patent and regulatory purposes and shall properly reflect all work done and results achieved in the performance of its duties hereunder (including all data in the form required to be maintained under any Applicable Laws), and any subsequent pre-clinical or clinical studies (the “Clinical Records”). The Clinical Records generated in the Territory shall be owned by CYTO and shall be considered Confidential Information of CYTO and ABI. ABI may request the Clinical Records, and CYTO shall provide the Clinical Records to ABI, subject to applicable laws and regulations. These records include books, records, reports, research notes, charts, graphs, comments, computations, analyses, compilations, recordings, photographs, computer programs and documentation thereof, computer information storage means, samples of materials and other graphic or written data generated in connection with CYTO's research and development activities with respect to the Product.
 
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(e)  In the event ABI requests that more than 1,000 pages be copied in connection with the foregoing, ABI shall reimburse CYTO for CYTO’s actual out of pocket costs for making copies in excess of 1,000 pages, ABI shall pay CYTO such amounts within 30 days following ABI’s receipt of an invoice therefor accompanied by documentation reasonably supporting such invoice.
 
 
(f)  ABI has the right, upon fifteen business days’ prior written notice to CYTO, to review the Clinical Records associated with human oral IFN upon request and during normal business hours, and CYTO shall, subject to Applicable Laws, provide ABI upon request with a copy of all requested Clinical Records, at ABI’s cost, to the extent reasonably required for the exercise of ABI's rights under this Agreement. ABI may use the Clinical Records and the summaries thereof for commercial and regulatory approval purposes. If ABI wants to provide a non-governmental entity Third Party with the Clinical Records or a summary thereof or use information contained in such records for a commercial purpose, ABI may do so as long as the non-governmental entity Third Party agrees to the Confidentiality provisions of Section 15.01.
 
 
 
Each Party shall maintain laboratories, offices and/or other facilities reasonably necessary to carry out the activities to be performed by such Party hereunder. Upon reasonable advance notice, each Party agrees to make its employees and non-employee consultants reasonably available at their respective work locations to consult with the other Party on issues arising during the collaboration and in connection with any request from any Governmental Authority, including regulatory, scientific, technical and clinical testing issues. Such meeting may be arranged through the internet or site visit. The meetings should be arranged within 15 working days after the requests, where feasible.
 
 
 
On or prior to December 31st of each year during the TERM of this Agreement CYTO shall provide ABI with a report of ongoing development efforts, including a report of efforts by CYTO with respect to clinical testing, regulatory approval efforts, marketing/sales strategy, and any other areas into which CYTO's reasonable business efforts in accordance with this paragraph may reasonably be categorized. Such report shall be provided in English and shall be accompanied by samples of labeling, instructions, promotional and other support materials, if any, developed for CYTO's sales force, patients, physicians, or other outside parties.
 
 
ARTICLE III:
 
 
LICENSE
 
 
 
Subject to the terms of this Agreement and the Existing Licenses, ABI hereby grants to CYTO:
 

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(a)  an exclusive sublicense, with rights to sublicense (subject to Section 16.10), under the ABI Technology to use the ABI Technology to market, advertise, promote, Manufacture, offer for sale, sell, and distribute the Product in the Territory; and
 
 
(b)  an exclusive sublicense, with rights to sublicense (subject to Section 16.10), under all rights granted to ABI pursuant to the HBL Agreement to market, advertise, promote, Manufacture, offer for sale, sell, and distribute the Product in the Territory.
 
 
In addition to the transfer fees and Royalty, if CYTO licenses the right to a third unrelated party (except for those who are CYTO’s subsidiaries), ABI shall receive **** of any license fee, option fee, or other payment, which CYTO may receive for the sublicense of rights under this Agreement to the sale and/or use of Product.
 
 
Section 3.02. Restrictions. 
 
CYTO shall have the right to use and sell Product only in the Territory and only for use in the treatment of the Licensed Indications. CYTO shall not seek customers, establish any branch or maintain any distribution depot for Product in any country outside the Territory. CYTO shall not sell Product to any customer in any country outside the Territory or to any customer in the Territory if, to the knowledge of CYTO, such customer intends to resell such Product in any country outside the Territory.
 
 
Section 3.03. Retained Rights. 
 
ABI retains all rights other than as set forth in this Agreement to HBL IFN and IFN, including without limitation, the right to test, develop, license, sublicense, market, distribute or otherwise use IFN and HBL IFN for treatment of the Licensed Indications outside the Territory.
 
 
Section 3.04. First Right of Refusal. 
 
CYTO shall have a first right of refusal to add to this Agreement as Licensed Indications, in the Territory, other human clinical indications treated or treatable by the oral administration of IFN, as such may become available from ABI from time to time in the future, within the term of this Agreement. In the event ABI should determine to license such an indication or indications in the Territory, ABI shall provide written notice of such intention to CYTO. If ABI proposes to license such indication or indications to any person or entity other than CYTO, ABI shall provide to CYTO, along with such written notice, a complete outline of the substantive terms of such proposed license; CYTO shall thereupon have a period of thirty (30) days to notify ABI, in writing, that it elects to enter into the license, on the terms and conditions set forth in such notice from ABI to CYTO. If CYTO does not so notify ABI of its election to license, then ABI shall be free to license such indication or indications to the party or parties identified in such notice, or to any other party or parties, during a period of ninety (90) days after the expiration of the aforesaid thirty (30) days, and if ABI does not so license the indication or indications within said ninety
 

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(90) day period, CYTO’s first right of refusal shall be reinstituted, with respect to any future license by ABI of such indication or indications, in the Territory. The first right of refusal contained in this Section 3.04 shall not constitute an obligation on the part of ABI to license any further indication or indications in the Territory and ABI may elect not to develop treatments for any further indications, or if it does develop such, ABI may elect not to license them in the Territory.
 
 
 
PAYMENTS AND ROYALTIES
 
 
Section 4.01. Initial Fee. 
 
 
 
After ABI notifies CytoPharm in writing or by e-mail of supplying documents above, CYTO will wire into ABI’s designated bank account an additional **** within 30 days.
 
 
Section 4.02. Royalty Payments. 
 
During the TERM, CYTO, its Affiliates or sub-licensees in bonafide arm’s length transactions, will pay ABI a royalty on aggregate Net Sales of Product in each calendar year equal to **** each year. Royalties shall be due and payable thirty (30) days after the end of each calendar quarter (each a “Royalty Payment Date”). CYTO may prepay, in whole or in part, any royalties prior to the applicable Royalty Payment Date.
 
 
Section 4.03. Milestone Payments. 
 
CYTO shall pay to ABI, as licensing fees, the following milestone payments within 30 calendar days after the occurrence of the specified milestone event with respect to the Product:
 
 
(a)  Clinical Trials: CytoPharm will pay **** for first patient enrollment for clinical trials in China for the first Licensed Indication. 
 
 
(b)  Regulatory Approval: CytoPharm will pay **** for China SFDA Approval for commercialization and marketing in China for the first Licensed Indication. 
 
 
(c)  Other: CytoPharm will pay **** for gaining approval from DOH for the first Licensed Indication.
 

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Section 4.05. Reports.  
 
CYTO shall furnish to ABI a quarterly written report (in sufficient detail to determine the relevant amounts and dates specified in this Section 4.05), which report shall contain at a minimum (a) the number of lozenges sold; (b) the calculation of Net Sales; (c) royalties payable in U.S. dollars, if any, which shall have accrued hereunder based upon Net Sales; (d) withholding taxes, if any, required by law to be deducted with respect to such sales; (e) the dates of the First Commercial Sale of any Product; and (f) the exchange rates, if any, used to determine the amount of United States dollars (collectively, the “Royalty Statement”). Reports shall be due on the 45th day following the close of each quarter.
 
 
Section 4.06. Records and Audits. 
 
During the TERM and for a period of two years thereafter or upon written notice to CYTO received prior to the expiration of such two year period as otherwise required in order for ABI to comply with Applicable Law, CYTO shall keep complete and accurate records in sufficient detail to permit ABI to confirm the completeness and accuracy of the information presented in each Royalty Statement and all payments due hereunder. CYTO shall permit an independent, certified public accountant reasonably acceptable to CYTO to audit and/or inspect those records of CYTO (including financial records) that relate to number of lozenges sold and Net Sales for the sole purpose of verifying the completeness and accuracy of the Royalty Statements and, the calculation of Minimum Royalties, Net Sales and confirming royalty payments for the Product, during the preceding calendar year. Such inspection shall be conducted during CYTO’s normal business hours, no more than once in any 12-month period and upon at least thirty (30) days’ prior written notice by ABI to CYTO. If such accounting firm concludes that such payments were underpaid during the periods reviewed by such accountants, CYTO shall pay ABI the amount of any such underpayments, within thirty (30) days of the date ABI delivers to CYTO such accounting firm's report so concluding that such payments were underpaid. If CYTO fails to remit the payment within thirty (30) days, interest at a rate equal to the Prime Rate of Interest shall be imposed starting from the 31st day. If such accounting firm concludes that such payments were overpaid during such period, ABI shall pay to CYTO the amount of any such overpayments, without interest, within thirty (30) days of the date ABI delivers to CYTO such accounting firm's report so concluding that such payments were overpaid. If ABI fails to remit payment within 30 days, interest at a rate equal to the Prime Rate shall be imposed starting from the 31st day. Provisions in this Section 4.06 requiring either Party
 

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to pay interest shall not prevent the other Party from immediately taking all actions necessary to collect all amounts due, or to enforce any other remedy under this Agreement. ABI shall bear the full cost of such audit unless such audit discloses an underpayment by more than **** of the amount due during such period. In such case, CYTO shall bear the full cost of such audit. CYTO shall provide ABI a copy of the CYTO audited financial statements with sufficient detail to show the portion of revenue from oral interferon sales each year to be delivered to ABI within 3 months of the end of CYTO’s fiscal year.
 
 
 
All payments hereunder shall be payable in United States dollars. With respect to each calendar quarter, whenever conversion of payments from any foreign currency shall be required, such conversion shall be made at the rate of exchange reported in The Wall Street Journal on the last business day of the applicable calendar quarter. All payments owed under this Agreement shall be made by wire transfer to a bank account designated in writing by ABI, unless otherwise specified in writing by ABI.
 
 
Section 4.08. Late Payments. 
 
Unless otherwise provided in this Agreement, upon the failure of CYTO to pay any amount due under this Agreement within five days after receipt of notice by ABI that such amount has become due and payable and has not been paid, CYTO shall pay interest to ABI on such amount from the date such amount is due under this Agreement at the rate of **** per annum calculated on the number of days such payment is delinquent, unless such payment is being disputed by CYTO in good faith pursuant to Section 5.03(a). Nothing in this Section 4.08 shall relieve CYTO of CYTO’s obligation to make payments, risk Termination pursuant to Section 5.03(a), or provide a Royalty Statement pursuant to Section 5.03(b).
 
 
Section 4.09. Taxes. 
 
All taxes levied on account of the payments accruing to ABI under this Agreement shall be paid by ABI for its own account, including taxes levied thereon as income to ABI. If provision is made in law or regulation for withholding, such tax shall be deducted from the payment made by CYTO, paid to the proper taxing authority and a receipt of payment of the tax secured and promptly delivered to ABI.
 
 
ARTICLE V:
 
TERM AND TERMINATION
 
 
 
This Agreement will take effect on the Effective Date and will remain in force through December 31, 2016 (the “TERM”) after which it shall automatically be renewed for successive periods of one year each, unless terminated earlier under provisions of this Article V or if notice of termination is given by either Party at least one hundred twenty (120) days prior to the December 31st anniversary of any year after 2016.
 

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CYTO may terminate this Agreement by notice to ABI as follows:
 
 
(a)  immediately, if CYTO reasonably determines based upon the clinical trials and after consultation with ABI that receipt of Governmental Approval for a Product is unlikely, and/or
 
 
(b)  immediately, if CYTO reasonably determines based upon the market competition and after consultation with ABI that the profitability of the Product is unlikely.
 
 
Section 5.03. Termination by ABI. 
 
ABI may terminate this Agreement by notice to CYTO, upon any of the following conditions:
 
 
(a)  if CYTO shall fail to make any payments to ABI on the date on which such payments are due hereunder and such failure continues for more than 10 days after CYTO’s receipt of notice of such failure to pay; provided, however, that this subsection (a) shall not apply to any payment, or portion thereof, under this Agreement, which is the subject of a good faith dispute (a “Disputed Amount”) between CYTO and ABI. Any Disputed Amount shall be resolved by the Parties within 30 days from the date CYTO notifies ABI of a good faith dispute; provided, however, if the Disputed Amount cannot be resolved to the mutual satisfaction of the Parties within such 30-day period then either Party may request that the dispute be submitted to the Chief Executive Officers of ABI and CYTO, respectively, or their designees, for joint resolution. If the Disputed Amount is not jointly resolved by the Parties' Chief Executive Officers, or their designees, within ten days after the submission thereto, then ABI shall be entitled to pursue any and all remedies at law available to it. In no event will the dispute resolution period for the activities set forth above exceed a maximum of 60 days unless otherwise agreed in writing by the Parties. Further, CYTO may in its discretion elect to pay any such Disputed Amount and in the event such amount is finally determined not to have been payable by CYTO, ABI shall reimburse CYTO for such amount, without interest; or
 
 
(b)  if CYTO shall fail to deliver to ABI a Royalty Statement by the Royalty Payment Date and shall fail to cure such default within 30 days after notice from ABI with respect thereto; or
 
 
(c)  if CYTO shall commit any material breach of the provisions of this Agreement other than a breach set forth in subsections (a) or (b) above, provided that ABI has first given CYTO notice specifying the details of the material breach, and CYTO has not cured such material breach, if such breach is capable of being cured within such time period, within 45 days of the effective date of such notice; or
 
 
(d)  if CYTO fails to market product in the Territory within nine (9) months of the Effective Date, provided all such product registration, governmental approvals, manufacturing process, etc. have been completed and CYTO has had reasonably sufficient time to market the product; or
 
 
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(e)  if CYTO fails to use commercially reasonable efforts as required in Section 2.02 regarding any one Licensed Indication, such failure shall be cause for Termination of this Agreement for that particular Licensed Indication but shall not be cause for termination as to other Licensed Indications.
 
 
(f)  anytime after 12/31/2016 with or without cause upon 3 months prior written notice to CYTO, or,
 
 
(g)   immediately, if the HBL Agreement is terminated.
 
 
 
This Agreement may be terminated by the Party specified below immediately upon written notice to the other Party of the occurrence of either of the following events:
 
 
(a)  by either Party upon a cessation of operations in the ordinary course of the other Party or the institution by or against such Party as debtor of any proceeding (whether voluntary or involuntary) in bankruptcy or for dissolution, liquidation, reorganization, arrangement or the appointment of a receiver, trustee or judicial administrator (or the equivalent thereof in the jurisdiction in question) or any other proceeding under the law for the relief of debtors, if, in the case of an involuntary proceeding, the same shall not have been dismissed or stayed within 45 days after its institution; or
 
 
(b)  by either Party if the other Party makes an assignment for the benefit of, or arrangement with, its creditors or becomes unable to pay its debts as they become due.
 
 
(c)  A Party's failure to terminate this Agreement for any of the reasons specified in this Section 5.04 shall not in any way be deemed a waiver of such Party's rights in respect thereof or otherwise limit its rights to enforce the obligations hereunder.
 
 
Section 5.05. Remedies.  
 
All of the non-breaching Party's remedies shall be cumulative, and the exercise of one remedy hereunder by the non-defaulting Party shall not be deemed to be an election of remedies. These remedies shall include the non-breaching Party's right to sue for damages for such breach without terminating this Agreement.
 
 
 
In the event of termination of this Agreement:
 
 
(a)  Neither Party shall be discharged from any liability or obligation to the other Party that became due or payable prior to the effective date of such termination;
 
 
(b)  CYTO shall discontinue, and shall cause its Affiliates and sublicensees to discontinue, the sale of the Product; and
 
 
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(c)  In the event of termination by ABI under Section 5.03, all duties of ABI (other than under Section 5.08) and all rights (but not duties) of CYTO (other than under Section 5.08) under this Agreement shall immediately terminate without the necessity of any action being taken either by ABI or by CYTO, and
 
 
CYTO shall have a period of six months to sell off its inventory of Product existing on the date of termination and shall pay royalties to ABI with respect to such Product sales within 30 days after the expiration of such six-month period.
 
 
Section 5.07.  Bankruptcy.  
 
In the event that ABI as a debtor in possession, or a trustee in bankruptcy under the U.S. Bankruptcy Code, rejects this Agreement or CYTO’s right to continue the licenses under this Agreement, CYTO may elect to retain its license rights under the Agreement by paying all applicable fees, and otherwise acting in accordance with Section 365(n) of the U.S. Bankruptcy Code. Thereafter, neither ABI as debtor in possession, nor a trustee in bankruptcy, shall interfere with the rights of CYTO to use the ABI Technology under this Agreement.
 
 
 
Expiration or termination of this Agreement shall not relieve the Parties of any obligation accruing prior to such expiration or termination. Except as otherwise set forth in this Agreement, the obligations and rights of the Parties under Articles X, XIII, XIV (other than Section 14.03), and Sections 5.06-5.09, and 12.03, and 15.01 (for the period set forth therein) shall survive expiration or termination of this Agreement.
 
 
 
Except to the extent necessary for CYTO to exercise its rights to the ABI Technology under Section 5.07, within 30 days following the expiration or termination of this Agreement, each Party shall return to the other Party, or destroy, upon the written request of the other Party, any and all Confidential Information of the other Party in its possession and upon a Party's request, such destruction (or delivery) shall be confirmed in writing to such Party by a responsible officer of the other Party. Notwithstanding the provisions of this Section 5.09, either Party may retain one (1) copy of such Confidential Information for the sole purpose of determining its continuing confidentiality obligation to the other Party under this Agreement.
 
 
 
SUPPLY, MANUFACTURE AND PURCHASE OF PRODUCT
 
 
 
 

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shall provide Product or Bulk IFN from HBL as directed in a forecast by CYTO, at CYTO’s sole discretion. CYTO may, at CYTO’s sole expense, subcontract any part of the Manufacturing Process for the Product to Third Parties provided the Product and the facilities used to Manufacture the Product continue to meet the requirements set forth in this Agreement. CYTO will bear the cost of validation and necessary stability testing, and any manufacturing setup costs or up front fees.
 
 
 
(a) During the TERM, CYTO shall have the right to purchase Product or Bulk IFN from ABI in accordance with the terms of this Agreement. CYTO shall have the right to Manufacture Product from Bulk IFN.
 
 
(b) If at any time during the TERM ABI shall have both (i) materially breached this Agreement, and (ii) filed for protection under the bankruptcy laws of the United States, CYTO may thereafter attempt to negotiate and enter into an agreement with HBL pursuant to which HBL will supply CYTO with IFN.
 
 
 
ABI shall ask HBL to Manufacture or cause to be Manufactured the Product in accordance with the Specifications and this Agreement. CYTO shall promptly notify ABI in writing of any changes required by a Governmental Authority in the Specifications or CYTO’s quality assurance procedures that would render ABI or its supplier unable to supply the Product in accordance with the terms of this Agreement. The Parties agree to develop and execute an appropriate action plan in such situation. Any additional costs or expenses shall be paid by CYTO.
 
 
 
ABI agrees to ask HBL to furnish to CYTO with every Shipment a written certificate of analysis and Certificate of Compliance that confirms conformity of the Product to the Specifications and this Agreement. CYTO shall analyze each Shipment promptly upon receipt in accordance with Section 8.02. In addition, ABI shall as HBL to:
 
(a)  provide CYTO with written sampling and testing procedures used by ABI or its manufacturer to assure that the Product conforms to the Specifications;
 
 
(b)  retain a sample of each batch of Product for a period equal to the greater of (i) one year after the date of Manufacture of such batch of Product or (ii) such period as required by Applicable Laws. Upon the request of CYTO, ABI shall ask HBL to make such samples available to CYTO for inspection. The retained sample shall be sufficient in size to allow CYTO to perform tests to determine whether the Product meets the Specifications. ABI shall store the retained sample in accordance with the Specifications and Applicable Law,
 
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(c)  maintain records to ensure CYTO’s ability to perform a complete lot history via lot tracing of the Product,
 
 
(d)  keep on file all manufacturing records and analytical results pertaining to the Manufacture of each batch of Product for a period expiring not earlier than one year after the expiration date of the last lot of the last batch of Product Manufactured and Shipped to CYTO. ABI shall make, and shall cause any Third Party manufacturer to make, such records available to CYTO upon request,
 
 
(e)  provide CYTO with notice within 48 hours following ABI's receipt of notification of any scheduled inspection, and as soon as possible following ABI's receipt of notification of any unscheduled inspection, by any Governmental Authority of ABI's facilities, books or records, or of the facilities, books or records of any subcontractor being utilized by ABI to perform any portion or all of the Manufacture or development of the Product. ABI shall inform such Governmental Authority that CYTO may desire to be present at such inspection; provided that CYTO’s right to be present is subject to approval by such Governmental Authority and subject to CYTO being available at the time and date established by such Governmental Authority and, with respect to any inspection of HBL's facilities, HBL's consent to the presence of CYTO at such inspection. ABI shall use reasonable efforts to secure a time and date for such inspection that is reasonably acceptable to CYTO; provided, however, that ABI alone shall have the right to make the final decision on all such matters;
 
 
(f)  maintain at its expense any and all licenses, permits and consents necessary or required to perform its obligations under this Agreement; and
 
 
(g)  ensure that all Products delivered, have a remaining shelf life from the time of manufacture of not less than five years if refrigerated to at least 2-8 degrees Centigrade or two years, if maintained at or below 25 degrees centigrade.
 
 
Section 6.05. CYTO's Duties if Manufacturing. 
 
CYTO agrees to furnish to ABI with every Shipment a written certificate of analysis and Certificate of Compliance that confirms conformity of the Product to the Specifications and this Agreement. ABI shall analyze each Shipment promptly upon receipt in accordance with Section 8.02. In addition, CYTO shall:
 
 
(a)  provide ABI with written sampling and testing procedures used by CYTO or its manufacturer to assure that the Product conforms to the Specifications;
 
 
(b)  retain a sample of each batch of Product for a period equal to the greater of (i) one year after the date of Manufacture of such batch of Product or (ii) such period as required by Applicable Laws. Upon the request of ABI, CYTO shall make such samples available to ABI for inspection. The retained sample shall be sufficient in size to allow ABI to perform tests to determine whether the Product meets the Specifications. CYTO shall store the retained sample in accordance with the Specifications and Applicable Law,
 
 
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(c)  maintain records to ensure ABI’s ability to perform a complete lot history via lot tracing of the Product,
 
 
(d)  keep on file all manufacturing records and analytical results pertaining to the Manufacture of each batch of Product for a period expiring not earlier than one year after the expiration date of the last lot of the last batch of Product Manufactured by CYTO. CYTO shall make, and shall cause any Third Party manufacturer to make, such records available to ABI upon request.
 
 
Section 6.06. Failure to Supply.
 
 
 
 
 
Section 6.07. Allocation.  
 
If ABI is unable to supply all of the requirements of the Product, and quantities ordered by CYTO in accordance with Section 7.06, then ABI shall allocate the resources available to it so that CYTO receives at least its proportional share of available supplies as determined based on reasonable forecasts (taking into consideration past sales and sales performance against forecast) of CYTO.
 
 
Section 6.08. Records and Audits. 
 
During the TERM and for a period of two years thereafter or such longer period as is required in order for CYTO to comply with Applicable Law, ABI shall keep complete and accurate records in sufficient detail to permit CYTO to confirm the completeness and accuracy of the information presented in each invoice sent to CYTO pursuant to this Agreement and all payments made by CYTO relying on such invoices hereunder. ABI shall permit an independent, certified public accountant reasonably acceptable to ABI to audit and/or inspect those records of ABI (including financial records) that relate to such invoices for the sole purpose of verifying the completeness and accuracy of such invoices during the preceding calendar year. Such inspection shall be conducted during ABI's normal business hours, no more than once in any 12-month
 

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period and upon at least ten days prior written notice by CYTO to ABI. If such accounting firm concludes that such payments were overpaid during the periods reviewed by such accountants, ABI shall pay CYTO the amount of any such overpayments, plus interest at a rate equal to the Prime Rate of Interest, within 30 days of the date CYTO delivers to ABI such accounting firm's report so concluding that such payments were overpaid. CYTO shall bear the full cost of such audit unless such audit discloses an overpayment by more than 5% of the amount due during such period. In such case, ABI shall bear the full cost of such audit.
 
 
 
PURCHASE AND SALE
 
 
ABI shall sell, and CYTO shall purchase Bulk IFN and Product at a purchase price equal to, the actual amount (exclusive of the Royalties as defined in the HBL Agreement) paid to HBL under the HBL Agreement as in effect at the time of such sale and purchase, plus ****, and all other reasonable costs of Manufacture actually paid by ABI with respect to such Product, for all Product supplied by ABI to CYTO pursuant to this Agreement (the “Purchase Price”). HBL has agreed to an initial price per lozenge of **** for commercial lots of bulk lozenges. The price of lozenges for clinical testing will be negotiated in good faith but the price will depend on volume and packaging needed. ABI shall invoice CYTO for all Product manufactured by ABI for CYTO, which invoice shall be accompanied by reasonable documentation, i.e., invoices for amounts paid by ABI, supporting the amounts set forth in the invoice, and payment shall be made to ABI before CYTO takes physical possession of Product or Bulk IFN. CYTO shall pay in advance to ABI any third party setup fees or advance fees required as part of the costs of manufacture.
 
 
 
After execution of this Agreement, ABI shall review and comment on any labeling and proposed changes to the labeling of the Product and shall be entitled to participate in discussions with the Governmental Authorities concerning any labeling or proposed labeling change so long as CYTO is purchasing the Product from ABI. Notwithstanding the above, CYTO shall make the final decision with regard to any labeling or labeling revisions
 
 
Both Parties will approve all artwork developed for inclusion in the Product packaging, including carton labels, package inserts, etc., which approval will not be unreasonably withheld, conditioned or delayed by either Party. If CYTO wishes to institute changes in labeling artwork, both Parties will develop a mutually acceptable implementation schedule. The actual cost of implementing such change will be at CYTO’s sole cost and expense, including any materials made obsolete by CYTO’s changes to the artwork. Neither Party shall alter, change or in any way modify the artwork, which has previously been approved, for any reason, without prior written authorization from the other Party, which approval will not be unreasonably withheld, conditioned or delayed, and provided that such approved artwork shall conform to all Applicable Laws.
 

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Section 7.03. Purchase Forms. 
 
Purchase orders, purchase order releases, confirmations, acceptances and similar documents submitted by a Party in conducting the activities contemplated under this Agreement are for administrative purposes only and shall not add to or modify the terms of the Agreement. To the extent of any conflict or inconsistency between this Agreement and any such document, the terms of this Agreement shall govern.
 
 
Section 7.04. Confirmation.  
 
ABI shall confirm each purchase order within ten business days from the date of receipt of a purchase order and shall supply the Product within a maximum of 30 days from the date of acceptance of a purchase order, or later if so specified in the purchase order. Failure of ABI to confirm any purchase order shall not relieve ABI of its obligation to supply Product ordered by CYTO in conformity with this Agreement.
 
 
Section 7.05. Delivery. 
 
Delivery for Product shall be at ABI's or its subcontractor's facility, which is currently located in Okayama, Japan, or such other location designated by ABI as CYTO may agree to in writing. Product shall be delivered, not cleared for export, to the carrier nominated by CYTO at the designated location, and CYTO, or its designated carrier, shall be responsible for loading. ABI shall ship Product in accordance with CYTO’s purchase order form or as otherwise directed by CYTO in writing. Title to any Product purchased by CYTO shall pass to CYTO upon the earlier of (a) a common carrier accepting possession or control of such Product, or (b) passage of such Product from the loading dock of ABI's or its subcontractor's facilities to CYTO or its agent.
 
 
 
Not later than six months after submission of the NDA for a Product or other applicable regulatory filing on a country-by-country basis, CYTO will provide ABI with a 12-month forecast of CYTO’s requirement of each Product, which forecast will include designation of whether such Product shall be provided in bulk or Unit form, for which an NDA, or other applicable regulatory filing, has been submitted, on a Product basis, as follows:
 
 
(a)  During the period commencing six months after submission of an NDA, or other applicable regulatory filing, for a Product through the end of the fourth full calendar quarter following the First Commercial Sale of that Product, the forecasts shall be provided quarterly, no less than 45 days prior to the beginning of each quarter. Said requirements will be based on standard production planning parameters, including sales forecasts, sales demand forecasts, promotional forecasts, inventory requirements, and the like. The first two quarters of the 12-month forecast will be stated in monthly requirements. ABI will inform HBL and ask HBL to stock a minimum amount of Product equal to the second two quarters of the 12-month forecast. The first three months of the 12-month forecast will be firm orders to purchase. The second three months will be allowed to be flexed from the previous forecast by plus or minus 25% per month
 

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until fixed by the subsequent forecast; provided that the aggregate adjustment from the quantity set forth in the previous forecast for such three-month period shall not exceed 50% in aggregate during that three-month period. For example, if CYTO’s forecast for the first three months was for 100 Units and its forecast for the second three months was for 200 Units, the maximum number of Units CYTO could order at the time the second three-month period becomes fixed would be 300 Units (i.e., 50% of 200 Units plus the 200 Units originally forecast). The last two quarters of any 12-month forecast will be an estimate and not binding.
 
 
(b)  Following the end of the fourth full calendar quarter following the First Commercial Sale of a Product, CYTO will provide to ABI a rolling 12-month forecast for each Product with the first three months of the rolling 12-month forecast a firm order to purchase. Each forecast under this subsection (ii) shall be provided monthly, no less than 20 days prior to the beginning of each month. All orders will be for full batch quantities.
 
 
It is understood that ABI will not maintain Product inventory in excess of the applicable forecast, but will produce Product upon receipt of that portion of CYTO’s forecasts that constitute firm orders to purchase. Nothing in this Agreement shall obligate ABI to deliver Product if HBL is unable for any reason to provide Product.
 
 
CYTO agrees to purchase a sufficient amount of Product to enable CYTO to carry sufficient inventory to allow for fluctuations in sales demand so as to allow ABI reasonable lead-time to meet increased demand. ABI will use commercially reasonable efforts to meet any increase in demand in excess of the allowed adjustment, but will not be obligated to do so. All forecasts will be made by CYTO to ABI in good faith based upon standard commercial parameters. From time to time after the Effective Date, the Parties shall consider whether, in light of market demand, manufacturing capacity, inventory levels and other pertinent factors, to revise the schedule for delivery of forecasts and, if appropriate, negotiate in good faith to revise such schedule.
 
 
ARTICLE VIII:
 
WARRANTY, REJECTION AND INSPECTIONS
 
 
 
 
 

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CYTO shall have 45 days after the receipt of any Shipment to determine conformity of the Shipment to the Specifications and/or Applicable Laws, except for hidden defects. A “hidden defect” shall mean a defect in the Product not discovered by CYTO during its testing of the Product in accordance with generally accepted industry testing procedures and which would not be a defect normally expected to be discovered in accordance with such testing. If testing of such Shipment shows a failure of the Shipment to meet the Specifications and/or Applicable Laws, CYTO may return the entire Shipment, or any portion thereof, to ABI at ABI's expense within a reasonable time following the above described testing, provided that notice of non-conformity is received by ABI from CYTO within 45 days of CYTO’s receipt of said Shipment. CYTO shall have the right to request that ABI provide to CYTO, within 30 days after such notice is received by it, Product that meets the Specifications and Applicable Laws or to promptly provide CYTO with full credit for the Purchase Price paid by CYTO for the returned Product. In the case of a hidden defect, CYTO shall have the right to request that ABI provide to CYTO, within thirty (30) days after a notice concerning a hidden defect is received by CYTO, Product that meets the Specifications and Applicable Laws or to promptly provide CYTO with full credit for the Purchase Price paid by CYTO for the returned Product. In either case, the cost of freight and handling to return or replace Product or shall be at the expense of ABI. If CYTO does not notify ABI of the non-conformity of the Product within 45 days of receipt of said Shipment, the Product shall be deemed to meet the Specifications (including those related to packaging of the Product) and Applicable Laws, except with respect to hidden defects. Notwithstanding anything in this Agreement to the contrary, the Parties may agree to a return of the Product or an adjustment in the Purchase Price in the event of any failure or defect in the Product. Should there be a discrepancy between CYTO’s test results and the results of testing performed by ABI, such discrepancies shall be finally resolved by testing performed by an independent Third Party mutually agreed upon by CYTO and ABI. The costs of such testing shall be borne by the Party against whom the discrepancy is resolved. In the event Product have been previously returned to ABI and such independent Third Party determines that the Product meets the Specifications, CYTO shall be responsible for all costs associated with the return.
 
 
Section 8.03. CYTO Inspections. 
 
ABI shall ask HBL upon reasonable (but not less than fifteen (15) days) prior written notice by CYTO and during normal business hours to allow CYTO to inspect and audit ABI's facilities and the facilities of HBL or other subcontractors of ABI used to Manufacture the Product, twice annually, to confirm that the such facilities and the equipment, personnel and operating and testing procedures used by ABI or such subcontractors in the Manufacture, testing, storage and distribution of the Product are in compliance with Applicable Laws and the Governmental Approvals; provided that such inspection does not interfere with ABI's or such subcontractor's normal operations or cause ABI or such subcontractor's to violate or be in breach of any confidentiality agreements with any Third Parties.
 

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REGULATORY COMPLIANCE 
 
 
 
CYTO will own all Marketing Authorizations. CYTO agrees, at its sole cost and expense, to maintain the Marketing Authorizations including obtaining any variations or renewals thereof, including all fees and licenses, including user fees, related to the Manufacture of the Product by CYTO. Each Party agrees that neither it nor its Affiliates or permitted sublicensees will do anything to adversely affect a Marketing Authorization.
 
 
 
Each Party, including its permitted sublicensees, shall advise the other Party, by telephone or facsimile, immediately but in no event later than 24 hours after a Party, or its sublicensees, becomes aware of any potentially serious or unexpected adverse event (including adverse drug experiences, as defined in Applicable Laws) involving the Product (each, an “ADE”). Such advising Party shall provide the other Party with a written report delivered by confirmed facsimile of any adverse reaction, stating the full facts known to such Party, including customer name, address, telephone number, batch, lot and serial numbers, and other information as required by Applicable Laws. During the TERM, CYTO shall have full responsibility for (i) monitoring such adverse reactions; and (ii) data collection activities that occur between CYTO and the patient or medical professional, as appropriate, including any follow-up inquiries which CYTO or ABI deem necessary or appropriate.
 
 
In the event either Party requires information, regarding adverse drug events with respect to reports required to be filed by it in order to comply with Applicable Laws, including obligations to report ADEs to the Governmental Authorities, each Party agrees to provide such information to the other on a timely basis.
 
 
The Parties agree to follow CYTO’s standard operating procedure for reporting and identifying adverse drug reactions (the “SOP”) in effect from time to time, a copy of which CYTO will provide to ABI. In the event the SOP is modified or amended during the TERM, CYTO shall provide ABI with copies of any such modification or amendment to the SOP for ABI's prior approval, which will not be unreasonably withheld, conditioned or delayed, at least five business days prior to such amendment taking effect. CYTO shall designate a qualified person under Applicable Laws to be responsible for ADE reporting in each country in the Territory.
 
 
If the report of an ADE causes a Governmental Authority to request a labeling revision as a result of an ADE or that a Phase IV surveillance program be conducted, then the Parties shall promptly enter into discussions and shall mutually agree on all of the material terms and
 

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conditions of such labeling revision or Phase IV surveillance program; provided, however the costs of such labeling revision or Phase IV surveillance program shall be paid by CYTO. CYTO shall have the authority to make the final decision with regard to any labeling revisions provided that CYTO will consider, in making its decision, the effect any such labeling revisions will have on the marketing and sale of the Product outside the Territory. CYTO agrees that should Applicable Laws require that any such interim data and results from such Phase IV surveillance programs be prepared in written form, CYTO shall comply with such requirements and provide all such information in writing to ABI and the Governmental Authorities in accordance with Applicable Laws. CYTO further agrees that ABI shall have the right to incorporate, refer to and cross-reference such results and underlying data in any regulatory filing or any other filing or requirement ABI is required to undertake with respect to the Product, if any.
 
 
 
If, after the date of First Commercial Sale in any country in the Territory, a Governmental Authority requires (a) additional testing, modification or communication related to approved indications of the Product or (b) CYTO to conduct a Phase IV study as a condition to receiving a Marketing Authorization, then CYTO shall design and implement any such testing, modification or communication and the costs shall be paid by CYTO.
 
 
Section 9.04. Assistance.  
 
Each Party shall provide reasonable assistance to the other at the other's request, in connection with their obligations pursuant to this Article IX, subject to reimbursement of all of its out-of-pocket costs by the requesting Party.
 
 
Section 9.05. Compliance.  
 
CYTO shall be responsible for compliance with Applicable Laws and the Governmental Approvals relating to the design, possession, promotion, marketing, sale, advertising and distribution of the Product and Units, including obtaining all necessary permits, licenses and any other requirements relating to the import, sale and distribution of the Product. ABI shall be responsible for compliance with Applicable Laws and Governmental Approvals relating to the Manufacture of the Product, as applicable, and with cGMP relating to the Manufacture and testing of the Product, as applicable. CYTO and ABI shall comply with all Applicable Laws within the Territory as set forth in this Agreement, including the provision of information by CYTO and ABI to each other necessary for ABI and CYTO to comply with any applicable reporting requirements. Each Party shall promptly notify the other Party of any comments, responses or notices received from, or inspections by, the FDA, or other Governmental Authority, which relate to or may impact the Product or the Manufacture of the Product or the sales and marketing of the Product, and shall promptly inform the other Party of any responses to such comments, responses, notices or inspections and the resolution of any issue raised by the FDA or other Governmental Authority.
 

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REPRESENTATIONS, WARRANTIES AND COVENANTS
 
 
Section 10.01. Corporate Power. 
 
Each Party hereby represents and warrants that such Party is duly organized and validly existing under the laws of the state of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof.
 
 
Section 10.02. Due Authorization. 
 
Each Party hereby represents and warrants that such Party is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder.
 
 
 
Each Party hereby represents and warrants that this Agreement is a legal and valid obligation binding upon it and is enforceable in accordance with its terms. The execution, delivery and performance of this Agreement by such Party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it.
 
 
 
As of the Effective Date, ABI represents and warrants that (a) it has all right, title and interest in and to HBL IFN and the ABI Technology necessary to grant CYTO the licenses hereunder, (b) except for those rights granted to Existing Licensees under the Existing Licenses and except with respect to CYTO, it has not granted any license to any Third Party under the ABI Technology (or any component thereof) and is under no obligation to grant any such license, (c) there are no outstanding liens, encumbrances, agreements or understanding of any kind, either written, oral or implied, regarding either the ABI Technology, any component thereof or the rights of ABI in and to HBL IFN pursuant to the HBL Agreement.
 
 
 
ABI represents and warrants that:
 
 
(a)  each Material Agreement is valid, binding, and enforceable in accordance with its terms against ABI and, to the knowledge of ABI, each other party thereto, and is in full force and effect.
 
 
(b)  ABI has performed in all material respects all obligations imposed on it under each Material Agreement and neither ABI nor to the knowledge of ABI, any other party to a Material
 

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Agreement is in material default under any Material Agreement nor is there any event that with notice or lapse of time, or both, would constitute a material default by ABI, or, to the knowledge of ABI, any other party thereunder;
 
 
(c)  true and complete copies of each Material Agreement, including any amendments thereto, have been delivered to CYTO or its counsel by ABI,
 
 
(d)  each of the HBL Agreement and the TAMU Agreement were duly and validly executed in accordance with Applicable Law and no Person is materially renegotiating any amount paid or payable under either agreement or any material term or provision of the HBL Agreement or the TAMU Agreement.
 
 
 
ABI represents and warrants that it knows of no adverse effects or other properties that may raise objections from the FDA or other Governmental Authorities or may affect the use, effectiveness or merchantability of the Product.
 
 
 
During the TERM, each of the Parties shall endeavor to preserve the good name and reputation of the other Party and shall conduct itself in a manner as to maintain the good name and reputation of the other Party.
 
 
 
During the TERM, neither of the Parties shall utilize any employee, representative, agent, assistant or associate who has been debarred pursuant to the Act in connection with any of the activities to be carried out under this Agreement. 
 
 
 
Neither Party makes any warranties, express or implied, concerning the success or commercial utility of the Product.
 
 
 
EXCEPT FOR WILLFUL MISCONDUCT, GROSS NEGLIGENCE, BREACHES BY A PARTY OF SECTION 15.01 OR INFRINGEMENT OF THIRD PARTY PROPRIETARY RIGHTS, NEITHER PARTY SHALL BE ENTITLED TO RECOVER FROM THE OTHER PARTY ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION WITH THIS AGREEMENT OR ANY LICENSE GRANTED HEREUNDER.
 

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ARTICLE XI:
 
PATENTS AND TRADEMARK
 
 
Section 11.01. Filing, Maintenance and Protection of Patents. 
 
CYTO may, at CYTO's expense, file, maintain and protect the ABI Technology, if any, in the Territory during the TERM.
 
 
 
COVENANTS OF CYTO AND ABI
 
 
 
CYTO shall permit ABI, at ABI's expense and during normal business hours, to exercise the inspection rights granted to ABI by CYTO under Section 4.06.
 
 
Section 12.02. Further Actions. 
 
Upon the terms and subject to the conditions hereof, each of the Parties hereto shall use its commercially reasonable efforts to (a) take, or cause to be taken, all appropriate action and do, or cause to be done, all things necessary, proper or advisable under Applicable Law or otherwise to consummate and make effective the transactions contemplated by this Agreement, (b) obtain from Governmental Authorities any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by the Parties in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement and (c) make all necessary filings, and thereafter make any other required submissions, with respect to this transaction under (i) the Securities Exchange Act of 1934, as amended and the Securities Act of 1933, as amended, and the rules and Regulations thereunder and any other applicable federal or state securities laws and (ii) any other Applicable Law. The Parties hereto shall cooperate with each other in connection with the making of all such filings, including by providing copies of all such documents to the other Party's counsel (subject to appropriate confidentiality restrictions) prior to filing and, if requested, by accepting all reasonable additions, deletions or changes suggested in connection therewith. Without limiting the generality of the foregoing, each Party shall take or omit to take such action as the other Party shall reasonably request to cause the Parties to obtain any material Governmental Approvals and/or the expiration of applicable waiting periods, provided that the foregoing shall not obligate either Party to take or to omit to take any action (including, without limitation, the expenditure of funds or any holding separate and agreeing to sell or otherwise dispose of assets, categories of assets or businesses) as in the good faith opinion of such Party, would cause a material adverse effect on a Party.
 

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Section 12.03. Equitable Relief. 
 
The Parties understand and agree that because of the difficulty of measuring economic losses to the non-breaching Party as a result of a breach of the covenants set forth in this Article XII or Section 15.01, and because of the immediate and irreparable damage that may be caused to the non-breaching Party for which monetary damages would not be a sufficient remedy, the Parties agree that the non-breaching Party will be entitled to seek specific performance, temporary and permanent injunctive relief, and such other equitable remedies to which it may then be entitled against the breaching Party. This Section 12.03 shall not limit any other legal or equitable remedies that the non-breaching Party may have against the breaching Party for violation of the covenants set forth in this Article XII or Section 15.01. Subject to Section 16.03, the Parties agree that the non-breaching Party shall have the right to seek relief for any violation or threatened violation of this Article XII or Section 15.01 by the breaching Party from any court of competent jurisdiction in any jurisdiction authorized to grant the relief necessary to prohibit the violation or threatened violation of this Article XII or Section 15.01. This Article XII shall apply with equal force to the breaching Party's Affiliates.
 
 
ARTICLE XIII:
 
INDEMNIFICATION
 
 
 
ABI shall indemnify and hold CYTO harmless from and against any liabilities or obligations, damages, losses, claims, encumbrances, costs or expenses (including attorneys' fees) (any or all of the foregoing herein referred to as “Loss”) insofar as a Loss or actions in respect thereof, whether existing or occurring prior to, on or subsequent to the Effective Date, arises out of or is based upon (a) any misrepresentation or breach of any of the warranties, covenants or agreements made by ABI in this Agreement; (b) the Manufacture of any Product that is identifiable as having been Manufactured by or on behalf of ABI; (c) any claims that a Product (as a result of the use of the ABI Technology therein) or its Manufacture (as a result of the use of ABI Technology therein), use or sale infringes the patent, trademark or other intellectual property right of a Third Party.
 
 
 
CYTO shall indemnify and hold harmless ABI from and against any Loss insofar as such Loss or actions in respect thereof occurs subsequent to the Effective Date, whether existing or occurring prior to, on or subsequent to the date hereof, arises out of or is based upon (a) any misrepresentation or breach of any of the warranties, covenants or agreements made by CYTO in this Agreement or (b) CYTO’s material violation of any Applicable Law.
 

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No claim for indemnification hereunder shall be valid unless notice of the matter which may give rise to such claim is given in writing by the persons seeking indemnification (the “Indemnitee”) to the persons against whom indemnification may be sought (the “Indemnitor”) as soon as reasonably practicable after such Indemnitee becomes aware of such claim; provided that the failure to notify the Indemnitor shall not relieve it from any liability which it may have to the Indemnitee otherwise than under this Article XII. Such notice shall state that the Indemnitor is required to indemnify the Indemnitee for a Loss and shall specify the amount of Loss and relevant details thereof. The Indemnitor shall notify Indemnitee no later than 60 days from such notice of its intention to assume the defense of any such claim. In the event the Indemnitor fails to give such notice within that time, the Indemnitor shall no longer be entitled to assume such defense.
 
 
 
The Indemnitor shall at its expense, have the right to settle and defend, through counsel reasonably satisfactory to the Indemnitee, any action which may be brought in connection with all matters for which indemnification is available. In such event, the Indemnitee of the Loss in question and any successor thereto shall permit the Indemnitor full and free access to its books and records and otherwise fully cooperate with the Indemnitor in connection with such action; provided that this Indemnitee shall have the right fully to participate in such defense at its own expense. The defense by the Indemnitor of any such actions shall not be deemed a waiver by the Indemnitor of its right to assert a claim with respect to the responsibility of the Indemnitor with respect to the Loss in question. The Indemnitor shall have the right to settle or compromise any claim against the Indemnitee without the consent of the Indemnitee provided that the terms thereof: (a) provide for the unconditional release of the Indemnitee; (b) require the payment of compensatory monetary damages by Indemnitor only; and (c) expressly state that neither the fact of settlement nor the settlement agreement shall constitute, or be construed or interpreted as, an admission by the Indemnitee of any issue, fact, allegation or any other aspect of the claim being settled. No Indemnitee shall pay or voluntarily permit the determination of any liability, which is subject to any such action while the Indemnitor is negotiating the settlement thereof or contesting the matter, except with the prior written consent of the Indemnitor, which consent shall not be unreasonably withheld or delayed. If the Indemnitor fails to give Indemnitee notice of its intention to defend any such action as provided herein, the Indemnitee involved shall have the right to assume the defense thereof with counsel of its choice, at the Indemnitor's expense, and defend, settle or otherwise dispose of such action. With respect to any such action, which the Indemnitor shall fail to promptly defend, the Indemnitor shall not thereafter question the liability of the Indemnitor hereunder to the Indemnitee for any Loss (including counsel fees and other expenses of defense).
 

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DISPUTE RESOLUTION
 
 
Section 14.01. Disputes. 
 
The Parties recognize that disputes as to certain matters may from time to time arise during the TERM, which relate to either Party's rights and/or obligations hereunder. It is the objective of the Parties to establish procedures to facilitate the resolution of disputes arising under this Agreement in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Article XIV if and when a dispute arises under this Agreement.
 
 
Unless otherwise specifically recited in this Agreement, disputes among the Parties will be resolved as recited in this Article XIV. Disputes among the Parties first shall be presented to the chief executive officers of ABI and CYTO, or their respective designees, for resolution. In the event that the chief executive officers of ABI and CYTO, or their respective designees, cannot resolve the dispute within ten days of being requested by a Party to resolve a dispute, either Party may, by written notice to the other, invoke the provisions of Section 14.02.
 
 
Section 14.02. Trial Without Jury. 
 
If the Parties fail to resolve the dispute through negotiation in accordance with Section 14.01, each Party shall have the right to pursue any of the remedies legally available to resolve the dispute; provided, however, that the Parties expressly waive any right to a jury trial in any legal proceedings under this Section 14.02.
 
 
 
Each Party shall continue to perform its obligations under this Agreement pending final resolution of any dispute arising out of or related to this Agreement; provided, however, that a Party may suspend performance of its obligations during any period in which the other Party fails or refuses to perform its obligations.
 
 
 
Although the procedures specified in this Article XIV are the sole and exclusive procedures for the resolution of disputes arising out of or related to this Agreement, either Party may seek a preliminary injunction or other provisional equitable relief, if, in its reasonable judgment, such action is necessary to avoid irreparable harm to itself or to preserve its rights under this Agreement.
 

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 Notwithstanding the foregoing, any dispute relating to the determination of validity of claims, infringement or claim interpretation relating to a Party's patents shall be submitted exclusively to federal court.
 
 
 
CONFIDENTIALITY 
 
 
Section 15.01. Confidentiality. 
 
During the TERM and for a period of five years thereafter, each Party shall maintain all Confidential Information of the other Party as confidential and shall not disclose any such Confidential Information to any Third Party or use any such Confidential Information for any purpose, except (a) as expressly authorized by this Agreement, (b) as required by law, rule, regulation or court order (provided that the disclosing Party shall first notify the other Party and shall use commercially reasonable efforts to obtain confidential treatment of any such information required to be disclosed), or (c) to its Affiliates and its employees, agents, consultants and other representatives (“Representatives”) to accomplish the purposes of this Agreement, so long as such persons are under an obligation of confidentiality no less stringent than as set forth herein. Each Party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Each Party shall use at least the same standard of care as it uses to protect its own Confidential Information to ensure that it and its Affiliates and Representatives do not disclose or make any unauthorized use of the other Party's Confidential Information. Each Party shall be responsible for any breach of this Agreement by its Representatives. Each Party shall promptly notify the other Party upon discovery of any unauthorized use or disclosure of the other Party's Confidential Information.
 
 
Section 15.02. Publicity Review. 
 
The Parties agree that the public announcement of the execution of this Agreement shall be in the form of press releases issued by each of the Parties on or before the Effective Date and thereafter each Party shall be entitled to make or publish any public statement consistent with the contents thereof. The Parties acknowledge the importance of supporting each other's efforts to publicly disclose results and significant developments regarding the Product. The principles to be observed by ABI and CYTO in such public disclosures will be: accuracy, compliance with FDA Regulations and other FDA guidance documents and other Applicable Laws, the advantage a competitor of ABI or CYTO may gain from any public statements under this Section 15.02, and the standards and customs in the biotechnology and pharmaceutical industries for such disclosures by companies comparable to ABI and CYTO. The terms of this Agreement may also be disclosed by a Party to: (a) government agencies where required by law, including filings required to be made by law with the United States Securities and Exchange Commission
 

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(“SEC”), (b) Third Parties with the prior written consent of the other Party, which consent shall not be unreasonably withheld, or (c) lenders, investment bankers and other financial institutions solely for purposes of financing the business operations of such Party, so long as such disclosure in (b) and (c) above is made under an agreement of confidentiality at least as restrictive as the confidentiality provisions in Section 15.01, to the extent possible highly sensitive terms and conditions such as financial terms are extracted from the Agreement (including in any disclosure required by law or the SEC) or deleted upon the request of the other Party, and as the disclosing Party gives reasonable advance notice of the disclosure under the circumstances requiring the disclosure.
 
 
 
MISCELLANEOUS
 
 
 
 
 
 
All notices, requests and other communications to any party hereunder shall be in writing and shall be deemed to have been given if delivered personally, mailed by certified mail (return receipt requested) or sent by cable, telegram or recognized overnight delivery service to the parties at the following addresses or at such other addresses as, specified by the parties by like notice:
 
If to ABI : Dr. Joseph M. Cummins, Chairman & CEO
Amarillo Biosciences, Inc.
4134 Business Park Drive
Amarillo, TX 79110
Facsimile: (806) 376-9301

With a copy to: Edward L. Morris, Legal Counsel
SandersBaker, PC
320 S. Polk, Ste. 700
Amarillo, TX 79101
Facsimile: (806) 372-3725

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If to CYTO: John Gu, Chief Executive Officer
Cytopharm, Inc.,
6th Fl, No. 6, Sec. 1, Jungshing Road
Wugu Shiang, Taipei County, 248 Taiwan
Facsimile: (886) 2 8976-9626
Telephone: (886) 2 8976-9628

 
Notice so given shall be deemed given and received (i) if by mail on the 15th day after posting; (ii) by cable, telegram, telex or personal delivery on the date of actual transmission, with evidence of transmission acceptance, or (as the case may be) personal or other delivery; and (iii) if by overnight delivery courier, on the next business day following the day such notice is delivered to the courier service.
 
 
Section 16.03. Severability. 
 
Whenever possible, each clause, subclause, provision or condition of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any clause, subclause, provision or condition of this Agreement should be prohibited or invalid under applicable law, such clause, subclause, provision or condition shall be considered separate and severable from this Agreement to the extent of such prohibition or invalidity without invalidating the remaining clauses, subclauses, provisions and conditions of this Agreement.
 
 
 
This Agreement sets forth the entire agreement between the Parties hereto pertaining to the subject matter hereof and supersedes all negotiations, preliminary agreements, memoranda or letters of proposal or intent, discussions and understandings of the Parties hereto in connection with the subject matter hereof. All discussions between the Parties have been merged into this Agreement, and neither Party shall be bound by any definition, condition, understanding, representation, warranty, covenant or provision other than as expressly stated in or contemplated by this Agreement or as subsequently shall be set forth in writing and executed by a duly authorized representative of the Party to be bound thereby.
 
 
Section 16.05. Amendment. 
 
No amendment, change or modification of any of the terms, provisions or conditions of this Agreement shall be effective unless made in writing and signed on behalf of the Parties hereto by their duly authorized representatives.
 
 
Section 16.06. Counterparts. 
 
This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original document, but all such separate counterparts shall constitute only one and the same instrument. This Agreement may be signed and delivered to the other Party by facsimile signature; such transmission shall be deemed a valid signature.
 

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Section 16.07. No Waiver of Rights. 
 
No waiver of any term, provision, or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, provision, or condition of this Agreement.
 
 
Section 16.08. Force Majeure. 
 
Neither Party shall be liable hereunder to the other Party nor shall be in breach for failure to deliver, provided failure to deliver is no greater than the delay in time caused by circumstances beyond the control for either Party, including acts of God, fires, floods, riots, wars, civil disturbances, sabotage, accidents, labor disputes, shortages, government actions (including priorities, requisitions, allocations and price adjustment restrictions) and inability to obtain material, equipment, labor or transportation (collectively, “Force Majeure”).
 
 
Section 16.09. Further Assurances. 
 
The Parties hereto shall each perform such acts, execute and deliver such instruments and documents and do all such other things as may be reasonably necessary to accomplish the transactions contemplated in this Agreement.
 
 
 
Neither this Agreement nor any of the rights, interests, options or obligations hereunder may be assigned, sublicensed or delegated by either of the Parties without the prior written consent of the other Party, provided, however, that either CYTO or ABI may, without such consent, assign this Agreement and its rights and obligations hereunder in connection with the transfer or sale of all or substantially all of its business pertaining to this Agreement, or in the event of its merger or consolidation or change in control or similar transaction. Any permitted assignee shall assume all obligations of its assignor under this Agreement. Further, a Party may assign or sublicense any and all of its rights, interests, options, and delegate all obligations hereunder, to any Affiliate of such Party (and such Affiliate may further assign or sublicense this Agreement to such Party or any other Affiliate of such Party) without the consent of the other Party. In the event of an assignment or sublicense to an Affiliate, the assigning Party shall guarantee the performance of such assignee or sublicensee. The assignment or sublicense to an Affiliate shall not operate to discharge the assignor or sublicensor from any obligation under this Agreement. Any assignment that contravenes this Section 16.10 shall be void ab initio.
 

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Section 16.11. Expenses. 
 
The Parties hereto shall each bear their own costs and expenses (including attorneys' fees) incurred in connection with the negotiation and preparation of this Agreement and consummation of the transactions contemplated hereby.
 
 
Section 16.12. Binding Effect. 
 
This Agreement, and all of the terms, provisions and conditions hereof, shall be binding upon and shall inure to the benefit of the Parties hereto and their respective permitted successors and assigns.
 
 
Section 16.13. Governing Law. 
 
This Agreement shall be construed and interpreted in accordance with the laws of California, USA if a lawsuit against CYTO is initiated by ABI, and any such suit shall be brought in California, USA; this Agreement shall be construed and interpreted in accordance with the laws of Texas, USA, if a lawsuit against ABI is initiated by CYTO, and any such suit shall be brought in Texas, USA.
 
 
 
All statements contained herein, or in any schedule hereto, shall be considered a representation, warranty or covenant of the Party making such statement. All representations, warranties, covenants contained herein, or in any schedule hereto, shall survive the closing of this transaction.
 
 
 
This Agreement has been prepared jointly and shall not be strictly construed against either Party.
 
 
 
The status of the Parties under this Agreement shall be that of independent contractor. No Party shall have the right to enter into any agreements on behalf of the other Party nor shall it represent to any Person that it has such right or authority.
 

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IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the Effective Date.
 

AMARILLO BIOSCIENCES, INC.


By: /s/ Joseph M. Cummins
Joseph M. Cummins,
President and Chief Executive Officer


 
CYTOPHARM, INC.
 


By: /s/ Ellson Y. Chen
Ellson Y. Chen
Chairman of the Board of Directors

 

 
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